· 2010-07-06 · Dear Sirs and Mesdames! Herewith we present to you the Annual Report of the National Bank of Ukraine for 2008. The main feature of the reporting year was aggravation

N A T I O N A L B A N K O F U K R A I N E

A N N U A L R E P O R T

2 0 0 8

Dear Sirs and Mesdames!

Herewith we present to you the Annual Report of the National Bank of Ukrainefor 2008. The main feature of the reporting year was aggravation of the worldfinancial and economic crisis that provoked deceleration of the growth of the econ-omy of Ukraine. Whereas in the 1st half-year of 2008 the economy showed anupward trend due to the favorable conditions in the world market for raw materi-als, then in the 4th quarter the economic growth pace sharply slowed down due toreduction in the external demand, investment and consumer demand, as well asexpansion of the crisis phenomena over the financial sector. Despite the downwarddynamics of consumer prices in the second half of 2008, the inflationary pressureduring the year remained at a high level - 22.3% inflation.

Under these conditions the National Bank of Ukraine focused its efforts bothon curbing the high inflation rate in the first half-year and on mitigating the hryv-nia's devaluation against world currencies by means of deliberate use of the mon-etary instruments and tools at the end of the year.

In the 4th quarter of 2008, in the light of the unfavorable development ofprocesses in the world economy, artificially provoked distrust in some banks andthe banking system as a whole, and deposit outflow from the banks, the NationalBank of Ukraine was concentrated on keeping the stability of the banking sector.

During the year, the dynamics of deposits' attraction by banks drasticallychanged. Specifically, in the first half-year, the growth rate of the residents'deposits was quite high and in line with the economic activity in the country.However, for the tense situation in the financial market, starting from October2008, the deposit growth rate swiftly decelerated (to 126.7% by the year resultsas compared with 152.7%, in 2007). For the purpose of preventing the house-holds' deposits outflow from the banking system, in particular, in October-

December, and accumulating the resource base, the banks gradually increasedthe interest rates on the households’ deposits.

In 2008, dynamics of the loans extended to economic entities were irregular.In January-September 2008, noted was a tendency toward a gradual slowdownof the credit growth rate due to a complicated access to the external sources offunding, aggravation of the financial status of enterprises, a slump in solvency ofthe population, as well as the necessity to meet the NBU requirements purposedto limit banks' lending activities. However, starting from October 2008, an appre-ciable acceleration of the growth rate of crediting by banks took place, primarily atthe expense of hryvnia devaluation against the main foreign currencies. By theyear results, the lending rate slowed down to 172.0% as compared with 174.1%in the previous year.

Thus, during 2008, the banking sector developed under conditions of deposits'withdrawal and assets’ quality worsening. The National Bank of Ukraine approveda set of normative and legal documents for increasing the capitalization, the shareof long-term liabilities and banks' reserves; disclosing the information on ultimatebeneficial holders of banks; improving the risk management practice; raising thebanks' potential in respect of stress-testing; and implementing stricter prudentialregulations to the banks whose liquidity position worsened.

To improve the situation with meeting lenders’ claims on the banks under liquida-tion, first of all, the individual depositors’ claims, the Deposit Insurance Fund increasedthe amount of guaranteed recovery on the deposits up to UAH 150 thousand perevery depositor of a participant (or provisional participant) bank in the Fund, includ-ing the interest accrued on the date when the deposit became unavailable.

In 2008, the NSMEP continued to develop; innovative projects and technologieswere implemented by banks and by the Payment Organization of the system. Inparticular, continued was the pilot project ”Electronic Student Identification Card”for higher educational establishments of the 1st-4th accreditation class. Internet pay-ments through the NSMEP showed very expansive dynamics. In the reporting year,a mobile payment system, that provided for bank account control and manage-ment, as well as payments through a mobile telephone, was launched.

Finally, I would like to thank sincerely the numerous staff of the banking systemwhose professionalism and committal to the business were targeted towards ensur-ing development of the banking sector and strengthening the confidence in thebanking system.

Sincerely yours,

Governor

of the National Bank of Ukraine

Volodymyr Stelmakh

AnatoliiDanylenko

Decree of the President of Ukraineof 28.02.2005 №384/2005

PetroSabluk


SerhiiKliuiev

Resolution of the Verkhovna Radaof Ukraine of 11.01.2007 №560-V

VolodymyrStelmakh

Member of the Council of the National Bank of Ukraine

by position, as Governor of the National Bank of Ukraine

IhorPrasolov


Deputy Chairman of the Councilof the National Bank of Ukraine(Decision of the Council of the NationalBank of Ukraine of 23.02.2007 №4)

Members of the Council

PetroPoroshenko


Chairman of the Councilof the National Bank of Ukraine(Decision of the Council of the NationalBank of Ukraine of 23.02.2007 №4)

BorysKolesnikov


VasylHorbal


ValeriiHeiets


AnatoliiFedorenko


VolodymyrPoliachenko

Decree of the President of Ukraineof 16.05.2008 № 448/2008

MykhailoHoncharov


MykolaOnischuk


Arsenii Yatseniuk


of the National Bank of Ukraine (as at 1 January, 2009)

Members of the Board

VolodymyrStelmakh

Governor of the National Bank of Ukraine

AnatoliiShapovalov

First Deputy Governorof the National Bank of Ukraine

OlhaKandybka

Directorof the Financial Department

ViktorKravets

Executive Director on Payment Systems and Settlements

Oleh Daschenko

Executive Director on Cash Circulation

VasylPasichnyk

Directorof the Legal Department

IhorIvaniuk

Directorof the Personnel Department


VolodymyrKrotiuk

Deputy Governorof the National Bank of Ukraine

PavloSenysch


OlexandrSavchenko


NataliaHrebenykDirector of the

Monetary Policy Department

ViraRychakivska

Chief Accountant – Director of the Accounting Department

AnatoliiSavchenkoDirector of the

Information Technology Department

IhorShumylo

Executive Directoron the Economy

MykolaLavruk

Executive Directoron Administration

AnatoliiStepanenko

Head of the Main Departmentfor the City of Kyiv and Kyiv Region

NBU Governor Volodymyr Stelmakh

First Deputy GovernorAnatolii Shapovalov

Deputy GovernorVolodymyr Krotiuk

AuditDepartment

(operationally)

ForeignExchangeRegulation

Department

Executive Director

on Economics Ihor Shumylo

Statisticsand ReportingDepartment

ExecutiveDirector

on AdministrationMykola Lavruk

ArchiveOffice

MonetaryPolicy

Department

Department ofBanks’

Reorganizationand ActivityTermination

Division ofSupervisoryRegulationsCompliance

Control

Department of Banks'

Registration andLicensing

Departmentof EconomicAnalysis andForecasting

NBUMaintenance and

AdministrationOffice

Department forPrevention of

Legalization ofthe Proceedsfrom Crimethrough the

Banking Systemand Terrorism

Financing

Balanceof PaymentsDepartment

NBU Scientific

Research Centre

NBU Construction

Office

AuditDepartment

Bank SecurityDepartment

NBU CouncilOffice

Guard of NBUInstitutions

in Kyiv

Group of Advisersto NBU Governor

Directoratefor BankingRegulation

and Supervision

Departmentof ForeignExchangeReserve

Managementand Open

MarketOperations

Office for Legal Provision

of BankingSupervision

Department of Banks'

Inspection

Department of Off-Site

BankingSupervision

Department forNormative andMethodological

Provision of Banking

Regulation andSupervision

Tenders andMarketing

Research Office

Organizational Chart

Executive Director – Director

of Directoratefor BankingRegulation

and SupervisionOlexandr Kirieiev

Departmentof ExternalEconomicRelations NBU Educational

Institutions

NBU CentralLibrary

Deputy Governor Olexandr Savchenko

Deputy GovernorPavlo Senysch

RiskManagement

Unit

AccountingDepartment

CashCirculation

Department Payment Systems

Department

State Treasury of Ukraine

NBU Central Vault

CentralAccounting

House

ProjectMonitoring

Unit forInternationalCredit Lines

attachedto NBU

InformationTechnologyDepartment

NBU Money Museum

NBU OperationsDepartment

NBU BanknotePrinting and

Minting Works

FinancialDepartment

NBU RegionalBranches

NBU Banknote Paper Mill

NBU TrainingCentre

PersonnelDepartment

Executive Director on Cash

Circulation Oleh Daschenko

Executive Director

on PaymentSystems

and Settlements

Viktor Kravets

Directorate of Administering

the NBUCorporate Non-State

Pension Fund


NBU Board’sSecretariat

LegalDepartment

EditorialOffice of NBU

Periodicals

Department ofForeign Exchange

Regulation and Licensing

ABOUT THE NATIONAL BANK OF UKRAINE

The National Bank of Ukraine is the central bank of Ukraine, the single issuing center of thecountry, the state organ of monetary and foreign exchange regulation and banking supervision.The National Bank of Ukraine is a special central body of the state management, whose legalstatus, tasks, functions, powers and organization principles are determined by the Constitutionof Ukraine, the Law of Ukraine "On the National Bank of Ukraine" and other Ukrainian laws.

The supreme managerial body of the National Bank of Ukraine until 1999 was the Boardheaded by the Governor of the Board (from 1997 – the Governor of the National Bank ofUkraine). In compliance with the Law of Ukraine "On the National Bank of Ukraine", the gov-erning bodies of the National Bank of Ukraine are the Council of the National Bank of Ukraineand the Board of the National Bank of Ukraine.

The National Bank of Ukraine formation took place in particularly complex environment ofthe transition economy, construction of the conceptually new state management system, dras-tic change in the country's political situation and exacerbation of a chronic economic and finan-cial crisis. Under such conditions, the National Bank of Ukraine met with difficulties in solvingthe problems of not only general economic or political character, such as gaining the appropri-ate central bank's status and the place in the state management system, elaboration andimplementation of the appropriate monetary and lending policy, money turnover management,foreign exchange market regulation etc., but also with specific practical tasks related to creationof the material and technical base, formation of personnel, development of the regulatory andlegal framework of banking.

The solution of these tasks was complicated by lack of a preparatory period in the devel-opment of the National Bank of Ukraine and therefore it had to take immediate decisions.

The most remarkable events which determined the development of the National Bank ofUkraine as the central bank of the state were confirmation of its right to issue the nationalmoney of Ukraine; elaboration of theoretical and methodological foundation of the monetaryand lending policy and organizational mechanism of its implementation.

Adoption of the Law "On the National Bank of Ukraine" by the Verkhovna Rada of Ukrainein 1999, became a remarkable milestone in the NBU development. This, in fact, tallied up thestage of institutional establishment of the National Bank of Ukraine as the central bank, fixedlegally its place in the economic system, underlined its status, functions and controlling mech-anisms in line with the new conditions and prospects for the development of Ukraine.

The tasks that face the National Bank of Ukraine determine its role and place within the eco-nomic system of Ukraine. Like the central banks of other market economy countries, theNational Bank of Ukraine is destined to be the issuing centre of the state, the body of bankingregulation and supervision, as well as the body of monetary and foreign exchange regulation ofthe economy. Exercising appropriate functions and operations, the National Bank of Ukrainehas an effect on all sides of the country's economic life and above all ensures the stability ofthe national monetary unit.

One of the basic functions of the National Bank of Ukraine is to represent the interests ofUkraine in its relations with the central banks of other countries and international financialorganizations.

The National Bank of Ukraine cooperates closely with the International Monetary Fund, theWorld Bank and the European Bank for Reconstruction and Development, the EuropeanCentral Bank, national central banks of member countries of the European Union, the Bank forInternational Settlements in Basle, central banks of many countries, as well as leading com-

mercial banks of Western Europe and the USA on the issues of monetary policy, organizationof banking supervision, monetary and banking statistics, balance of payments, implementationof settlement systems and international accounting standards used in the international practice.The National Bank of Ukraine has correspondent relations with banks of many countries.

The organizational structure of the National Bank of Ukraine has a functional and territorialbasis. It includes the Central Office functioning in the City of Kyiv, and regional branches in theAutonomous Republic of the Crimea, City of Kyiv and Kyiv Region, and in 23 regional centersof Ukraine. The Central Office consists of functional departments, which in their turn haveoffices and divisions. A number of structural units including the Operations Department, theCentral Clearing House, the State Treasury, the Central Vault, the Banknote Printing andMinting Works and the Banknote Paper Mill are subordinated to the National Bank of Ukraine.

Putting into operation the Banknote Paper Mill and the Banknote Printing and MintingWorks created a closed cycle of the national money manufacture (banknotes and coins) inUkraine.

The National Bank of Ukraine includes the following structural subdivisions: the ScientificResearch Center, the Central Library, the Training Center and the Museum of Money. TheNational Bank of Ukraine has the following educational institutions: the Banking Universityincluding the Lviv, Kharkiv and Cherkasy Banking Institutes, as well as the Ukrainian BankingAcademy.

Formation of the Council of the National Bank of Ukraine in 2000 became an important steptowards improving the monetary policy elaboration and realization. This promoted the estab-lishment of the National Bank of Ukraine as a special central body of the state management, itsindependence in pursuing the monetary policy, further development of the system of credit insti-tutions and intensification of their activity.

The National Bank of Ukraine holds an adequate place among the central banks of thedeveloped countries. It is reliable in exercising the entrusted functions, the basic of which is toassure stability of the national currency.

The National Bank of Ukraine has assured the formation of two macroeconomic data sys-tems of monetary and balance of payments statistics.

The official publications of the National Bank of Ukraine "The Herald of the National Bankof Ukraine" (supplements to the edition "Legal and Normative Acts on Banking" and "Banknotesand Coins of Ukraine"), "Bulletin of the National Bank of Ukraine" and "Balance of Paymentsand Foreign Debt of Ukraine" are prepared and published on a regular basis.

With due regard for the importance of the banking system and a considerable contributionof employees of this sector to the development of the country's economy and support of finan-cial stability, the professional holiday "The Banker's Day" was instituted in Ukraine by the Orderof the President of Ukraine and is annually celebrated on May 20.

Part 1

GENERAL ECONOMICSITUATION

1.1. SOCIAL AND ECONOMIC SITUATION IN UKRAINE

1.1.1. Gross domestic productIn 2008, the real gross domestic product (GDP) showed irregular dynamics. In January-

September, 2008, the economic growth scored 106.3 versus 107.7% for the same period of2007. At the end of the year, as far as the economic environment on the export markets aggra-vated, the consumer and investment demand declined, and so did the real GDP growth rate,that in 2008 made up 102.1% versus 107.9%, in 2007 (See Figure 1).

Figure 1. Real gross domestic product of Ukraine in 1991–2008(as compared with the previous year)

In 2008, the nominal GDP grew by 31.8 % as compared with the previous year and reachedUAH 949.9 billion. The deflator increased to 129.1% versus 122.7%, in 2007.

Breakdown of GDP by economic sectorsIn 2008, the unfavorable economic situation affected the dynamics of all the economic sec-

tors, except for agriculture (see Figure 2).

Figure 2. Breakdown of gross added value by principaleconomic activities (% as compared with the previous year)

Both internal and external demand dropping sharply, the industrial output has fallen. Therecent overheating of the real estate market, slumping of investments in construction and a lackof working capital of the construction companies have driven the crisis in the construction indus-

14

Annual Repor t 2008

Construction

try. Recession in both industry and construction entailed activity deceleration in the wholesaleand retail trade.

The only sector contributing to the GDP growth was agriculture. Thanks to a rich grain har-vest, in 2008, the agricultural sector stably ascended in the 2nd half-year and carried its weightof 1.1 percentage points to the GDP growth (see Figure 3).

Figure 3. Shares of economic sectors in the growth*

In addition, for three years straight the net tax on agricultural products made a material con-tribution to the GDP growth.

GDP structure by final consumption The analysis of the GDP structure by final consumption has showed that, in 2008, the con-

sumption, like in the previous years, was the key driving factor of the economic growth.

Final consumer expenditures have a lion's share of 79.2% in the GDP structure. It is 1.7percentage points less than in 2007 (See Table 1).

Table 1. GDP STRUCTURE BY FINAL CONSUMPTION (In actual prices)

2008 For information: 2007Increase Increase

Indicators decrease as decrease ascompared compared

with withUAH share, previous UAH share, previousbillion % year billion % year

GDP 949.9 100.0 2.1 720.7 100.0 7.9Including:Final consumer expenditures 752.5 79.2 9.0 558.6 77.5 13.6Gross accumulation 274.0 28.9 5.1 203.3 28.2 25.8Export of goods and services 444.9 46.8 5.2 323.2 44.8 3.3Imports of goods and services –521.5 –54.5 17.1 –364.4 –50.5 21.5

However, the access to financial resources for economic entities being very complicatedand the real population income going down, this component slowed its pace as it gained only9.0 % against 13.6%, in 2007.

15

General Economic Situation

*Estimates of the National Bank of Ukraine.

The investment activities fell during the year inasmuch as more and more companies wererunning at a loss and therefore, accumulating debts, which caused a cut in the foreign invest-ments. As a result, the gross accumulation went down to 105.1 versus 125.8%, in 2007.

In 2008, imports of goods and services continued to exceed the exports, which increasedthe trade balance deficit. However, for the internal demand dropping the imports of goods andservices fell materially.

Figure 4. Contributions to the real GDP growth*

Both final consumer expenditures and gross accumulation made a positive contribution to thereal GDP growth of 7.0 and 1.4 percentage points, respectively. However, as one can see fromFigure 4, their shares decreased as compared with 2007. The net exports of goods and servicesadversely affected the real GDP growth and amounted to "minus" 6.3 percentage points or 2.8percentage points less than in 2007.

GDP structure by type of income The GDP structure by income has shifted as the gross profit and mixed income decreased by

0.5 percentage points because of dropping the operating profit before tax of Ukraine's companiesand enterprises. At the same time, the share of employees' wages and salary and that of the nettax on industry grew by 0.2 and 0.3 percentage point, respectively (See Table 2).

Table 2. GDP STRUCTURE BY TYPE OF INCOME

2008 For information: 2007Indicators UAH share, UAH share,

billion % billion %

GDP 949.9 100.0 720.7 100.0Including:Wages and salary of employees 465.5 49.0 351.9 48.8Net tax on industry 118.4 12.5 87.8 12.2Gross profit, mixed income 366.0 38.5 281.0 39.0

Industrial outputIn 2008, the industrial output showed inconsistent dynamics, as at the beginning of the year

it ascended for high domestic and foreign demand, rise in the world prices for metal, boom inlending operations, and increase in households' income. However, starting with August, a rad-

16

Annual Repor t 2008

*Estimates of the National Bank of Ukraine.

ical deterioration of the external conditions and a decline in the domestic demand, both con-sumer and investment, resulted in slumping output. In 2008, for the first time since 1998, theoutput fell by 3.1% (See Figure 5). This reduction of output was driven by diminishing capitalinvestments in the industry, and a decrease in the export value as compared with the previousmonths, as a result of a sharp drop of the external demand and sinking of prices for basicUkrainian export goods.

Figure 5. Contributions to the real GDP growth(cummulative, to the respective period of the previous year)

In 2008, the Ukrainian industrial companies sold products worth UAH 779.1 billion (SeeTable 3). Like in the previous years, metallurgy and manufacture of finished metal articles; food-stuff, beverages, and tobacco goods; as well as machine building had the largest share in thetotal worth of goods sold: 24.3%, 14.2%, and 14.0%, respectively.

Table 3. BASIC INDUSTRIAL INDICES BY TYPE OF INDUSTRY

In 2008, nearly every industry faced recession (See Figure 6).At the beginning of the year, the machine-building industry rapidly accelerated its pace

(125.0%, in January-September 2008), however, at the end of the year, its growth rate fellsharply to 108.6% for both the aggravation of the general economic situation in partner coun-tries and a decrease in the domestic demand and in the investment activities.

In 2008, the output in metallurgy sank by 10.6%, as a consequence of the material deteri-oration of the external conditions and a decline in the domestic demand from construction andmachine-building enterprises.

17


including:

Indicators Industry Mining Processingindustry industry

2008 2007 2008 2007 2008 2007 2008 2007

Sales of goods, UAH billion 779.1 717.1 77.0 56.3 588.9 530.2 113.2 130.6

Share in the total goods sold, % 100.0 100.0 9.9 7.9 75.6 73.9 14.5 18.2

Industrial output index,% as compared with the previous year 96.9 110.2 97.6 102.7 96.8 111.7 97.5 103.2

Power, gas and water generation and supply

Figure 6. Major industries (as compared with the previous year, %)

In 2008, the food industry showed a 0.9% decline in output, because of the real populationincome slowing down and imports of some foodstuffs growing sharply.

Throughout the year, the production of coke and petroleum refining products was slumpingand reported a decrease by 15.0%, as a result of descending world prices for oil and petrole-um products, and cutting oil supplies to Ukrainian refineries.

In the mining industry, output slumped by 2.4%, in 2008, as a consequence of a downfall inthe production of fuels and minerals, in particular, coal, because of dropping demand from themetallurgical enterprises.

Downward dynamics of the industrial output, including metallurgy, adversely affected thedemand for power, gas, and water generation and supply, where output fell by 2.5%, in 2008.

AgricultureIn 2008, the total output in agriculture increased by 17.1% and reached UAH 150.8 billion

(See Figure 7) thanks to the favorable dynamics of plant cultivation stimulated by a high yield,chiefly of cereals and leguminous crops (yield per unit grew 1.6 times, the cultivated areaincreased by 14%). Downward profitability of the cattle breeding, as a result of essential sink-ing of the purchase prices, caused reduction of livestock. Consequently, output in the cattlebreeding added only 1.0%, in 2008.

Figure 7. Growth rate of agricultural output

18

Annual Repor t 2008

TradeAt the beginning of the year, wholesale and retail trade showed swift ascending dynamics

due to the regular growth of the population income and lending boom in the banking sector.However, as far as the economic situation aggravated, at the end of year, the trade dynamicsalso decelerated. In 2008, gross value added slowed down to 101.8% (See Figure 8). Insofaras the real population income decreased, the retail trade decelerated to 118.6%, while stagna-tion in construction and metallurgy affected the wholesale trade growth.

Figure 8. Growth rate of value added in wholesale and retail trade

ConstructionIn 2008, the crisis mainly manifested itself in construction, where output dropped by 15.8%

(See Figure 9). The unfavorable dynamics were basically reasoned by deceleration of mortgagelending growth, curtailment of the government support of construction projects, and keeping ofhigh prices for construction and mounting works that, in their turn, resulted in a decrease inloans issued to the construction sector.

Growing risks related to suspension of construction-in-process, as a result of a lack of work-ing capital of the construction companies, led to the outflow of private investments from the con-struction sector.

Figure 9. Growth rate of civil works output(cummulative, to the respective period of the previous year)

Investments A downfall of the investment activities was among the main driving factors of the economic

growth deceleration in Ukraine, in 2008. It was caused by the unfavorable situation in the worldmarkets, drastic worsening of financial status of enterprises, and a decrease in households' sav-ings. In the reporting year, the companies and organizations funded at their own expense, capi-tal investments worth UAH 233.1 billion, that was by 2.6%1 less than in 2007 (See Figure 10).

19


1 In comparable prices.

Figure 10. Capital investments growth dynamics in 2005–2008 (% as compared with the previous year, in comparative prices of 1996)

The principal sources of funding of capital investments were the companies own funds plusloans from banks and other credits and loans; their share in the total investments made up74.0%, the share of loans from banks and other loans and credits growing most impressively(by 0.7 p. p.) as compared with 2007 (See Table 4).

Table 4. STRUCTURE OF CAPITAL INVESTMENTS BY SOURCES OF FUNDING2008 2007

Indicators UAH million % %

Investments in fixed assets (capital investments) 233 081.0 100.0 100.0Companies' own funds 132 138.0 56.7 56.5Borrowed funds 100 943.0 43.3 43.5Domestic sources 93 351.6 40.1 40.0

Including:Loans from banks and other loans and credits 40 450.9 17.3 16.6Budget funds 21 494.2 9.2 9.4Investment funds 5 675.5 2.4 2.2Other sources of funding 25 730.4 11.1 11.7Foreign sourcesFunds from foreign investors 7 591.4 3.3 3.5

As regards the breakdown by economic activities, in 2008, the priority directions for investmentswere industry, real estate operations, and transport and communication which had shares of32.9%, 21.0, and 14.0% of the total capital investments, respectively (See Figure 11). However,as compared with 2007, the capital investments in these economic activities decreased by 5.3,5.8, and 17.6%, respectively.

20

Annual Repor t 2008

Figure 11. Structure of capital investments by type of economic activities

At the same time, in 2008, investments in agriculture, hunting, and forestry grew by nearly42.3%, their share in the total capital investments accounting for 7.2% against 5.1%, in 2007.The share and amount of investments in trade, construction, education, and healthcare alsoshowed upward dynamics.

1.1.2. Dynamics of consumer prices and producer prices

In 2008, inflation processes escalated, as the consumer price index (CPI) reached 122.3versus 116.6%, in 2007 (See Table 5) and came to a peak since 2000.

Table 5. CONSUMER PRICE INDEX2008 For information: 2007

Before Share in CPI Before Share in CPIDecember percentage December percentage

Components of the points of the pointsprevious year, previous year,

% %

CPI 122.3 22.3 116.6 16.6Foodstuff and nonalcoholic beverages 124.5 13.2 123.7 13.1

Bread and bake goods 127.8 2.5 119.5 1.7Meat and meat food 134.0 4.7 113.9 1.8Fruits 137.8 1.5 160.3 1.9

Housing, water, power, gas and other fuels 128.2 3.7 112.3 1.4Transport 122.5 0.9 114.1 0.6Core CPI 121.3 11.7 110.8 5.9

The inflation processes were developing irregularly in the consumer market:– In January-May, the CPI grew swiftly (up to 131.1% on the annualized basis) (See

Figure 12), primarily because of a hike in the prices for foodstuff. On the one hand, it was pro-voked by the poor yield of 2007, on the other hand, by raising social standards (minimumwages, pension, subsistence wages), salaries of employees in the budget sector, as well as bythe reimbursements of losses from savings depreciation paid to the population;

– In June, the inflation pressure weakened, whereas in July and August, a decrease in theprices for foodstuff, as a result of the highest for the last 4 years yield of cereal crops, fruits andvegetables, stimulated deflation;

21


– In September-December, the CPI began to grow again, however, on the annualized basisthe prices continued going down. Starting with September, the CPI increase was fed basicallyby a rise in utility payments.

Figure 12. Consumer price index, producer price index and core CPI(on annualized basis)

In 2008, prices for foodstuff and nonalcoholic beverages added 24.5% against 23.7%, in2007 (See Figure 13), and made the largest contribution to the CPI growth (13.2 percentagepoints). During the year, the prices rose for the whole range of foodstuff, except for sunfloweroil and vegetables (here, the prices fell by 1.7 and 0.4%, respectively).

Figure 13. Consumer price index and its major components(annualized basis)

In the reporting year, the utility payments and price for fuels grew by 28.2% (their share inthe CPI made up 3.7 percentage points). The prices for natural gas for the population recordedthe biggest hike as they had increased by 54.1%.

Prices for transport services added 22.5%, in the reporting year, their share in the CPIaccounting for 0.9 percentage points. It was provoked by a rise in prices for motor vehicle trans-portation on public highways (by 53.0%) and railways (by 25.3%). At the same time, as a resultof downfall of the world prices for oil and petroleum derivatives, the prices for fuel and lubricantswent down in value by 8.3%.

All other components of the consumer basket according to the By-purpose Classification ofIndividual Consumption got up, however, this fact did not affect so much the CPI growth.

In 2008, the core consumer price index (CCPI) accounted for 121.3% as compared with110.8%, in the previous year. During the year, it remained high. Its acceleration at the end of

22

Annual Repor t 2008

the year was driven by high inflation and devaluation expectations of economic entities. A shareof core inflation in the CPI constituted 11.7 percentage points, or more than a half of the totalrise in consumer prices.

After the escalation in the first half of the year the headline inflation remained the same asin the previous year and amounted to 123.8% (See Figure 14). Its sudden spike in May (146.4%on the annualized basis) was driven by a hike in prices for low-processed goods. As a conse-quence of downfall of the prices for raw materials and fuels, starting with June, the headlineinflation showed a downward trend.

Figure 14. Headline inflation and its components (on annualized basis)

In 2008, producer price index (PPI) made up 123.0% versus 123.3%, in 2007 (SeeTable 6). The PPI dynamics in the reporting year were influenced by the domestic and foreigndemand for metal products, and trends in the world prices for oil and petroleum derivatives.The prices in all industries grew, except for the production of crude oil, natural gas, and petro-leum derivatives.

Table 6. PRODUCER PRICE INDEX

2008 For information: 2007Before Share in CPI Before Share in CPI

December percentage December percentageIndicators of the points of the points

previous year, previous year,% %

PPI 123.0 23.0 123.3 23.3Mining industry 122.3 2.2 127.3 2.4Processing industry 118.4 14.8 123.4 17.8Production of coke and petroleum derivatives 84.4 –1.3 150.4 4.6Metallurgy and manufacture of ready-made products 119.2 4.7 122.2 5.4Machine-building2 121.8 3.1 111.9 1.5Power, gas, and water generation and supply 142.2 6.0 120.9 3.1

23


2 Machine-building industry comprises the manufacture of machinery, equipment, electric, electronic,and optical equipment and devices, as well as the manufacture of motor vehicles and transport facilities.

2007 2008

Power, water, and gas generation and supply had the largest share in the PPI growth (6.0percentage points), being followed by metallurgy and manufacture of finished metal articles (4.7percentage points) and the machine-building industry (3.1 percentage points).

The dynamics of producer price index were also irregular as:– In January-August, the producer prices showed an accelerating pace upward and

reached 146.9% (on the annualized basis), thanks to a rise in prices for metallurgical productsand finished metal articles (by 72.5% on the annualized basis) and an increase in both theexternal and domestic demand for metal;

– In September-December, the PPI tended downward as a result of the aggravation of sit-uation in the external markets which led to a decline in the demand for Ukrainian metal prod-ucts. So, the prices started to go down and, at the end of the year, the PPI fell to 119.2%. Inaddition, the world prices for oil and petroleum derivatives dropped (price for "Brent" oil sank by57.4% in the fourth quarter).

1.1.3. FinanceCorporate financeIn 2008, the dynamics of profit before tax gained by the Ukrainian companies and enter-

prises were uneven. In January-August, they tended upward for the favorable external anddomestic conditions. However, starting with September 2008, they slowed down the pacebecause of a decline in the domestic demand arising from a sharp drop of the real populationincome and wages, as well as from the aggravation of the economic conditions caused bystrong dependence on the situation in foreign markets (See Figure 15).

Figure 15. Financial results before tax of the Ukrainian companies and enterprises (cumulative, from the beginning of the year)

In 2008, Ukraine's companies and enterprises gained net operating profit before tax worthUAH 57.9 billion, by 55.5% less than in the previous year (in 2007, it grew by 72.9% and totaledUAH 121.4 billion). Operating profit before tax amounted to UAH 140.9 billion, losses UAH 83.0billion (See Table 7).

24

Annual Repor t 2008

Table 7. FINANCIAL RESULTS BEFORE TAX OF UKRAINE'S COMPANIES AND ENTERPRISES

2008 For information: 2007. Increase/ Increase/

UAH Share, decrease as UAH Share, decrease asIndustry billion % compared billion % compared

witn the witn theprevious previousyear, % year, %

Financial results of Ukraine's companies and enterprises, total 57.9 100.0 –55.5 121.4 100.0 72.9Including:Industry 31.1 53.8 –26.1 42.1 34.7 25.2Including:Mining industry 21.9 37.8 2.7 times 8.1 6.7 12.6

moreProcessing industry 6.7 11.6 –78.6 31.3 25.7 48.6Power, water, and gas generation and supply 2.6 4.4 –5.8 2.6 2.2 50.6Financial activities 18.8 32.5 –16.8 17.0 14.0 38.7Wholesale trade and brokerage in wholesale trade –2.2 –3.9 õ 13.4 11.0 2.7 times

moreReal estate operations, leasing, engineering, and services to companies and businesses –2.7 –4.6 õ 2.8 23.2 6.7 times

moreTransport and communication 9.5 16.4 –4.0 9.9 8.2 17.4Operating profit before tax 140.9 õ –4.3 147.3 õ 33.1Operating losses before tax 83.0 õ 3.2 times 25.8 õ –24.9

more

Starting with October, the companies and enterprises began to incur losses almost in all spheresof economic activities, except for the industry and financial sector. On the annualized basis, in 2008,the worst situation was registered for the companies dealing with real estate operations, leasing,engineering and services to business entities ("minus" UAH 2.7 billion), as a result of the droppingoutput in construction and allied sectors, as well as for wholesale operators and brokers ("minus"UAH 2.2 billion) for weakening purchase power of the population.

The financial results of industrial enterprises totaled UAH 31.1 billion, or 26.1% less than in theprevious year. The mining industry increased its financial results 2.7 times, whereas the processingindustry decreased by 78.6%.

Among the industrial enterprises the outsiders were foodstuff, nonalcoholic beverages produc-ers and tobacco companies ("minus" UAH 3.8 billion) and producers of coke and petroleum deriva-tives ("minus" UAH 1.2 billion), where losses exceeded profit 1.9 and 1.4 times, respectively. Despitethe losses of the three last months, metallurgical enterprises and manufacturers of finished metalarticles showed the positive financial results worth UAH 7.7 billion.

At the end of 2008, the share of unprofitable enterprises increased by 5.0 percentage points andaccounted for 33.9%.

Unlike the previous years, for the nine months of 2008, both receivables and payables swiftlyescalated.

As of October 1, 2008, the receivables (excluding small enterprises and budget institutions)reached UAH 706.7 billion and grew by UAH 197.3 billion or by 38.7% as compared with the begin-ning of the year (in 2007, they increased by UAH 103.1 billion or by 25.6%). The escalation was basi-cally driven by an increase in the short-term receivables (by UAH 167.6 billion) that had a share of94.7% in the total receivables in Ukraine.

At the end of September of 2008, the payables came up to UAH 886.4 billion having grown byUAH 226.9 billion or by 34.4% as compared with the beginning of the year (in 2007, they added UAH127.3 billion or 24.6%). Like the receivables, payables chiefly rose due to a rise in the short-term

25


payables (by UAH 185.1 billion), their share being equal to 88.1%. At the same time, the share oflong-term payables showed ascending dynamics.

The increase in both receivables and payables, in January-September of the reporting year,exceeded the total growth for the whole year 2007 (receivables grew 1.9 times, payables 1.7 times).

Starting with the second quarter, receivables had been growing with a higher pace thanpayables, which meant worsening of companies' solvency.

Government financeIn 2008, revenues of the Consolidated Budget of Ukraine totaled UAH 297.8 billion or 31.3% of

GDP, while expenditures (with loans minus repaid amount included) amounted to UAH 312.0 billionor 32.8% of GDP (See Table 8). As compared with 2007, the pressure on economic entitiesincreased as allocation of GDP through revenues of the Consolidated Budget of Ukraine grew by 0.9percentage points, while through expenditures by 1.2 percentage points.

Table 8. FULFILLMENT OF THE CONSOLIDATED BUDGET OF UKRAINE

2008 For information: 2007. Increase/ Increase/

UAH % of Share, decrease as % of Share, decrease asIndustry billion GDP % compared GDP % compared

witn the witn theprevious previousyear, % year, %

Revenues of the Consolidated budget of Ukraine 297.9 31.4 100.0 35.4 30.5 100.0 28.0Including:Tax revenues 227.2 23.9 76.3 40.9 22.4 73.3 28.2Including:

Income tax of individuals 45.9 4.8 15.4 32.0 4.8 15.8 52.6Corporate profit tax 47.9 5.0 16.1 39.1 4.8 15.6 31.5VAT 92.1 9.7 30.9 55.1 8.2 27.0 17.8

Non-tax revenues 60.5 6.4 20.3 24.6 6.7 22.1 19.7Expenditures of Consolidated Budget of Ukraine 312.0 32.8 100.0 37.1 31.6 100.0 29.7Including:Public administration 30.8 3.2 9.9 27.1 3.4 10.7 22.0Economic activities 51.3 5.4 16.5 26.8 5.6 17.8 48.2Healthcare 33.6 3.5 10.8 25.6 3.7 11.7 35.4Education 61.0 6.4 19.5 37.5 6.2 19.5 31.2Social insurance and protection 74.0 7.8 23.7 52.6 6.7 21.3 17.1Balance of the Consolidated Budget of Ukraine –14.2 –1.5 – 84.2 –1.1 – 2.1 times

more

In 2008, the budget policy was targeted towards current consumption, the expenditure paceexceeding that of the revenues. Notwithstanding the above facts, in January-November, the bal-ance of the Consolidated Budget was positive, inasmuch as almost in all months the expendi-tures were not fulfilled entirely. Only in December, a deficit of the Consolidated Budget worthUAH 14.2 billion (1.5% of GDP) was reported (See Figure 16) and exceeded 1.8 times thedeficit of 2007.

26

Annual Repor t 2008

Figure 16. Fulfillment of the consolidated budget of Ukraine in 2008(cumulative, from the beginning of the year)

The revenues of the Consolidated Budget of Ukraine added 35.4% (8.2%, with CPI takeninto account).

The basic source of the revenues was the tax revenues, their share accounting for 76.3%of the total revenues of the Consolidated Budget of Ukraine (in 2007, it was equal to 73.3%).

The revenues from VAT increased by 55.1% as compared with 2007 and throughout theyear had the biggest share in the structure of tax revenues. This share rose by 3.9 percentagepoints and made up 30.9% (See Figure 17). At the same time, the revenues from VAT were ful-filled for 93.4%, inasmuch as in the fourth quarter of 2008 they decreased (especially, fromimported goods), which resulted in under-fulfillment of the annual plan.

Figure 17. Structure of revenues of the Consolidated Budget of Ukraine

As far as the economic situation in the country aggravated, and consequently, the wagesgrowth pace decelerated, the annual revenues from tax on individual income were fulfilled onlyfor 96.2%. The share of income tax of individuals in the total tax revenues fell by 0.5 percent-age points as compared with the previous year and amounted to 15.4%.

27


The only tax that generated revenues exceeding the planned amount was the corporateprofit tax that was fulfilled for 112.0% of the annual plan.

The failure to fulfill the annual plan for the revenues from taxes entailed under-fulfillment ofthe plan for the revenues of the Consolidated Budget of Ukraine (97.7%). Like the State Budgetof Ukraine, in 2008, the local budgets also were not entirely fulfilled, the index of their fulfillmentbeing the lowest since 1999.

Expenditures from the Consolidated Budget of Ukraine increased by 37.1% (by 9.5%, withCPI taken into account) as compared with 2007. The expenditure plan was fulfilled for 92.1%and this index was the lowest as compared with the previous years, for a lack of sources offunding (the revenues from T-bills placement were gathered for 42.4%, the borrowings from for-eign institutions for 70.3% of the plan as established in the last version of the Budget). Duringthe reporting year, the expenditure targeted on current consumption was the priority direction;its share in the total expenditures grew by 3.8 percentage points against the previous year andaccounted for 86.7%. The capital expenditures were financed for 81.0%, this index beingamong the lowest for the last years. In 2008, it added only 6.5%.

The public debtAs of January 1, 2009, the public and government-guaranteed debt of Ukraine reached

UAH 189.4 billion or USD 24.6 billion (See Figure 18). In the hryvnia equivalent it increased 2.1times, in US dollars by USD 7.0 billion or by 40.0%. The growth was driven by both the publicdebt (83.3% of the total increment), and the government-guaranteed debt (3.4 times). A hike inthe government-guaranteed debt in November arose from an increase in the loans from inter-national organizations (the first tranche of the International Monetary Fund within the frameworkof the standby program for support of the banking sector).

Figure 18. Public and government-guaranteed debt

At the end of 2008, the ratio of public and government-guaranteed debts to GDP made up19.9% and added 7.6 percentage points as compared with the previous year.

In 2008, the actual public debt exceeded the limit by UAH 18.1 billion.

28

Annual Repor t 2008

1.1.4. INCOME AND EXPENDITURES OF THE POPULATION Income of the populationIn 2008, the nominal income of population totaled UAH 856.6 billion having grown by 37.4%

against 2007 (See Table 9, Figure 19).

Figure 19. Income and expenditure of the population of Ukraine(cumulative, to the respective period of the previous year)

The population spent its disposable income for purchase of consumer goods and services.In the reporting year, the disposable income added 37.2% due to raising social standards,increase in pensions, etc. In 2008, social aid and other current transfers received grew with ahigher pace (143.3%) than wages and salary (133.0%). Their share in the total population'sincome increased by 1.0 percentage point and made up 37.7%.

Table 9. INCOME OF UKRAINE'S POPULATIONFor information: 2007

2008, Increase/ Increase/Indicators UAH share, decrease share, decrease

billion % during the % during theyear, % year, %

Income of Ukraine'spopulation 856.6 100.0 37.4 100.0 32.0Including:Wages and salary 371.1 43.3 33.0 44.8 36.0Profit and mixed income 131.7 15.4 38.4 15.3 37.6Social aid and other current transfers received 323.0 37.7 43.3 36.7 24.5For information:Disposable income 646.3 x 37.2 x 29.5Real disposable income x x 9.6 x 14.8

The share of wages and salary in the structure of population's income remained almost thesame as in the previous year (43.3%). The pace of real disposable income decelerated becauseof the aggravation of economic situation in the country, especially, in the second half-year; itreached 109.6% versus 114.8 in 2007.

29


Wages and salaryAs compared with 2007, the nominal average monthly wages per one employee grew by

33.7% (in 2007, by 29.7%) and amounted to UAH 1806.40. In the industry the wages increasedby 29.8% and reached UAH 2016.64, which was higher by 11.6% than the average wages inthe whole economy; in the construction sector it added 23.3% and came to UAH 1832.98, inagriculture it grew by 46.8% and was equal to UAH 1076.46.

In the first half of 2008, the nominal wages continued their ascending dynamics. However,starting with May of the reporting year, in some economic activities the pace of wages sharplydecelerated because of the business recession (See Figure 20). In 2008, the highest growthwas registered in agriculture (by 46.8%), whereas the lowest in the forestry and related servic-es (by 19.2%). In 2008, the highest salaries were paid to employees of the financial sector(UAH 3747.14 or 2.1 times higher than the average wages for the whole economy), whereasthe lowest wages were paid in fishery and agriculture (UAH 913.07 and UAH 1076.46, respec-tively). Hence, the highest nominal wages exceeded 4.1 times the lowest ones.

Figure 20. Dynamics of nominal average wage (cumulative, to the respectiveperiod of the previous year)

In 2008, the rate of the real wages growth significantly slowed down and made up 106.3%(in 2007, 112.5%). In November-December 2008, the real wages decreased for slumping out-put in the industry, construction, and other sectors.

During the year, the arrears of wages added UAH 443.5 million or 59.5% and, as ofJanuary 1, 2009, came to UAH 1188.7 million (in 2007, they reduced by 17.1%). The arrearschiefly grew in the industry and construction, where they had the largest shares (57.0 and16.0% of the total arrears, respectively) (See Figure 21). The share of arrears of wages at oper-ating enterprises rose by 64.0% against 36.8% reported as of January 1, 2008.

Figure 21. Arrears of wages in major sectors of the economy

30

Annual Repor t 2008U

AH m

illion

Expenditures of the populationExpenditures and savings of Ukraine's population in 2008 totaled UAH 856.6 billion and

grew by 37.4% as compared with 2007, which influenced the ascending trend in the generaldomestic demand. In the reporting year, the population's expenditures increased by 36.7%,while savings added 46.0% (See Table 10).

Table 10. EXPENDITURES OF UKRAINE'S POPULATION2008 For information: 2007

Increase/ Increase/Indicators UAH share, decrease share, decrease

billion % during the % during theyear, % year, %

Expenditures and savingsof Ukraine's population 856.6 100.0 37.4 100.0 32.0Including:Purchase of goods and services 689.1 80.4 35.2 81.7 32.1Current income tax, property tax and other current transfers paid 67.4 7.9 37.4 7.9 45.1Accumulation of non-financial assets 17.7 2.1 78.2 1.6 38.8Growth of financial assets 52.1 6.1 37.6 6.1 2.1

The lion's share of the population's funds was spent for purchase of goods and services(80.4%) which was by 1.3 percentage points less than in the previous year. During the year, asfar as the population began to accelerate repayment of loans, the share of purchase of goodsand services in the total expenditures shifted from 82.5%, in January, to 80.4%, at the end ofthe year.

1.1.5. The labor marketIn 2008, the labor market dynamics mirrored the general economic development and faced

drastic changes during the year. At the beginning of 2008, the number of discharged employ-ees, as well as unemployment rate tended downward, whereas the number of unemployed peo-ple per a vacancy reduced, and the number of unemployed people who found work went up. Inthe last two months of 2008, the demand for labor force fell down. Consequently, the basicindices of the labor market worsened.

In 2008, the average monthly number of economically active population aged from 15 to 70years made up 22.4 million people, 21.0 million out of them were engaged in economic activi-ties, the rest 1.4 million being unemployed. The employment rate of the population aged from15 to 70 years was 63.3%; that of the able-bodied people accounted for 72.3%3.

As of January 1, 2009, the State Employment Service of Ukraine registered 876.2 thousandunemployed people or by 32.7% more than as of January 1, 2008. 96.4% of the unemployedpeople were officially recognized unemployed, 77.2% of them received unemployment benefits.More than a half of the unemployed people were inhabitants of rural regions. As regards thegender structure, 55% of the unemployed people were women.

In the reporting year, in Ukraine, the rate of registered unemployed people increased by 0.7percentage points and, as of January 1, 2009, came to 3.0% of the able-bodied population (SeeFigure 22). The increment in the registered unemployment was fed, basically, by rural regions,where the unemployment rate rose by 1.3 percentage point and accounted for 5.2% of the able-bodied rural inhabitants, whereas the urban regions reported unemployment growth by 0.5 per-centage points and the rate of 2.1%.

31


3 As of January 1, 2009, the total number of pensioners in Ukraine reached 13.9 million people.

Figure 22. Official unemployment rate and number of unemployed people per 10 vacancies (at the end of period)

Supply and demand for labor force were imbalanced from the standpoint of both vocation-al-qualification and geographical structure which entailed regional differentiation of the regis-tered unemployment. The highest unemployment rate was observed in Ternopil Region (5.1%),the lowest in Kyiv (0.6%).

The demand for the labor force tended downward. In the second half-year of 2008, thenumber of vacancies also showed descending dynamics and caved in the last two months (91.1thousand vacancies, in December, versus 177.7 thousand vacancies at the beginning of theyear). About a half of the vacancies were destined for workers, more than one-third for servantsand every seventh vacancy required unqualified labor force.

The number of unemployed people applying to the State Employment Service per a vacan-cy increased 2.5 times as compared with the beginning of the reporting year and amounted to96 people per 10 vacancies, at the end of 2008 (in 2007, 39 unemployed persons per 10 vacan-cies). The regional structure of the ratio of unemployed people per vacancy was within therange from 4, in Kyiv, to 767, in Cherkasy Oblast, at the end of 2008.

Thanks to the State Employment Service of Ukraine, in 2008, 1084.0 thousand people or43.3% of the registered unemployed population found the job.

In 2008, UAH 2.5 billion from the Fund of Mandatory Social Insurance againstUnemployment or 0.4% of GDP were spent for unemployment benefits.

1.2. EXTERNAL ECONOMIC SECTOR1.2.1 Balance of payments

In 2008, the foreign economic sector of Ukraine underwent drastic changes. In January-August, the dynamics of the previous years continued and even strengthened, when revenuesfrom the financial account allowed Ukraine not only to finance the current account deficit, butalso to accumulate reserves. However, starting with September, the situation turned upsidedown, as the adverse effect of the world financial and economic crisis on Ukraine's economyled to a double current account deficit in the fourth quarter of 2008.

Current account balanceIn 2008, the current account deficit reached USD 12.9 billion or 7.1% of GDP (in 2007, 3.7%

of GDP), primarily, through an increase in commodity balance (up to USD 17 billion) and neg-ative balance of income (up to USD 1.5 billion) (See Figure 23).

32

Annual Repor t 2008

Official unemployment rate, at the end of period (left scale)

Figure 23. Current account balance

Exports of goodsDespite deepening of the economic crisis at the end of the year, in 2008, exports increased

by 35.9% and totaled USD 67.7 billion (See Figure 24).

Figure 24. Exports of goods

The export growth in 2008 was stimulated chiefly by an increase in the export value: formetallurgical products by 32.9% (38.3% in the total export growth); for agricultural products 1.7times (25.6% of the export growth); for machine-building products by 28.6% (13.6% of theexport growth).

In the first three quarters of 2008, export of metallurgy products constituted a half of theexport growth, but in the 4th quarter the value of this group of products fell by 50.7% as com-pared with the 3rd quarter. This fall was caused by both sinking prices for ferrous metals (near-ly by 40%) and declining physical volumes of ferrous metal supplies (by 27.8%), as a result ofthe dropping external demand.

Export of agricultural products showed the most consistent dynamics due to both the risein prices for the agricultural products and a material increase in supplies of cereal crops.

In the first half-year of 2008, the high investment and consumer demand, primarily, in theCIS countries, boosted dynamic growth of export of machine-building products. However, as faras the demand from the Russian Federation declined, in the 4th quarter, export of machine-building products showed the result of the 1st quarter (USD 2.4 billion).

33


34

Annual Repor t 2008

In 2008, the share of the CIS countries in Ukraine's export trended downward: totally for theyear, it accounted for 35.7% (in 2007, 37.9%). Asia and America increased their shares in theregional export structure by 1.7 and 0.7 percentage points, respectively.

Imports of goods The value of import of goods rose by 40.1% and totaled USD 84.7 billion, as a result of

escalating domestic demand, principally, for consumer goods, as well as of rising world pricesfor energy, raw materials, and stock, in the 1st quarter of the year.

The import breakdown by wide economic groups showed that import of consumer goodspaced the most intensively, by 57.1%. Consequently, in 2008, the share of consumer goods inthe total import came up to 22.9% versus 20.1%, in 2007.

Effect of the financial crisis (swift devaluation of hryvnia, unavailability of credit resources,especially, for individuals, decline in the investment demand and construction output) provokeda sharp drop of imports in November-December of 2008 down to the average monthly rate of2007 (See Figure 25).

Figure 25. Imports of goods (change as compared with the respective period of the previous year)

The largest shares in the value of import in 2008 belonged to mineral products (31.6% ofthe total import, grew by 50.1%), machine-building products (28.4% of the total import; grew by34.8%); and chemical products (12.1% of the total imports, increased by 32.4%).

In 2008, machinery, equipment, and transport facilities worth USD 26.6 billion were import-ed to Ukraine which was by USD 6.9 billion more than in the previous year. One and a half timeincrease in import of motorcars, spare and service parts for them made up more than 35.0% ofthe machine-building import growth and 10.0% of the total imports.

In the reporting year, the far-abroad countries gradually increased their share in the geo-graphical structure of import of goods and contributed thereto 61.3% (in 2007, 58.9%), the paceof imports from these countries (45.9%) exceeding by 14.0 percentage points that from the CIScountries (31.9%).

ServicesThe year 2008 saw a positive balance of services totaling USD 2.4 billion. Nonresidents

were provided with services worth USD 17.9 billion, whereas the services received from non-residents amounted to USD 15.5 billion. The growth of services import therewith far exceededthe increase in exports and amounted to 31.9 and 26.4 per cent, respectively.

IncomeNegative balance of income grew 2.3 times as compared with 2007 and made up USD 1.5

billion which, first of all, was caused by a double increase in the payment of dividends on direct

35


investments and a 1.5-time growth of expenses for the foreign debt servicing. A 1.5-timeincrease in revenues as compared with 2007 was due to a rise in the wages and salary paid tothe Ukrainian citizens working abroad, as well as thanks to income from allocation of reserves.

Current transfersIn 2008, the positive balance of current transfers decreased by 11.6 per cent as compared

with the previous year and amounted to USD 3.1 billion. The received current transfersremained nearly at the level of the previous year and made up USD 4.2 billion due to a declineby 6.6 per cent in incoming money transfers from the employees working abroad (up to USD2.1 billion). The paid current money transfers rose during the year 1.7 times and achieved USD1 billion.

Financial account In 2008, the balance of financial account was positive and came to USD 9.5 billion, 37.1 per

cent less than in 2007. The reduction took place because of the outflow of funds in the fourthquarter of 2008 (USD 6.1 billion), which was observed for the first time during the recent twoand a half years and resulted from influence of the world financial crisis on the Ukrainian econ-omy.

Direct investments During 2008, net inflow of the foreign direct investments in Ukraine made up USD 9.7 bil-

lion, which is 5.0 per cent more than in 2007. The world financial crisis adversely affected, firstof all, the volume of direct foreign investments received. In the fourth quarter of 2008, the netinflow of foreign direct investments accounted for USD 934 million, which is 3.5 times less thanduring three previous quarters, in average (See Figure 26).

Figure 26. Direct investments in Ukraine's economy

Despite the crisis, the financial sector remained the most attractive for foreign investors: itsshare in the growth of foreign direct investments in 2008 made up 69.2 per cent versus 38 percent, in 2007.

The total direct investments in Ukraine, at the end of 2008, accounted for USD 46.8 billion4,shareholder equity having a lion's share of 90.9 per cent. The amount of foreign direct invest-ments per capita rose during the year by 23.5 per cent and came to UAH 1014.

4 With taking into account negative translation difference worth USD 4.1 billion for the fourth quarterof 2008, which resulted from hryvnia devaluation against world leading currencies.

36

Annual Repor t 2008

The biggest foreign direct investments were accumulated in the financial activities, 29.8 percent of the total amount, 20.9 per cent in real estate operations, and 13.0 per cent in metallurgy.

The biggest share in the capital of domestic corporations with foreign investments belongedto investors from Cyprus (31.2 per cent), Germany (15.0 per cent), and Austria (10.5 per cent).

Medium-term and long-term credits and Eurobonds In 2008, the total amount of net borrowings related to the long-term credits and Eurobonds

in the banking and real sectors came to USD 14.6 billion and practically remained fixed, at thelevel of the previous year.

Figure 27. Net borrowings related to medium- and long-term nonguaranteed credits and Eurobonds

Net long-term borrowings of the banking sector from the external markets decreased by 1.8per cent and totaled USD 8.8 billion, while those of the real sector decreased by 2.5 per centand were equal to USD 5.8 billion. As a whole, in 2008, the structure of net long-term loansremained identical with that in 2007: the share of the banking sector and the real sector was60.5 per cent and 39.5 per cent, respectively (See Figure 27).

The main peak of long-term borrowings was observed in the third quarter of 2008 (40.2 percent of the total net borrowings). However, in the fourth quarter, one could see a rise in therepayment on the previous credits and loans, whereas issue of the new loans decreased by 60per cent. This contributed to a decline in the net borrowings of long-term resources three timesas much compared with the previous quarter.

Other capitalIn 2008, the negative balance of other capital was by 7.6 per cent higher than in 2007 and

made up USD 13.9 billion. The negative balance for nine months of 2008 was by 39.8 per centless than in the respective period of 2007; essential outflow of capital worth USD 8.4 billion wasreported in the fourth quarter (See Figure 28).

The outflow of capital was brought on by high devaluation expectations of the populationwhich increased demand for FX cash that, in the fourth quarter of 2008, stimulated accumula-tion of FX cash worth USD 5.1 billion (USD 12.9 billion for 2008, as a whole) outside the bank-ing system.

Repayment of the banking sector short-term loans and credits previously received fromnon-residents and a lack of new short-term resources which resulted in the negative balance ofother capital in the fourth quarter of 2008 worth USD 2.8 billion was another important factor ofthe capital outflow. For the whole year, the capital outflow totaled USD 1.6 billion.

37


Figure 28. Other capital dynamics

Reserve assets As a whole, the consolidated balance of payments deficit in 2008 came to USD 3.2 billion

which was financed at the expense of the first tranche of the Standby credit worth USD 4.6 bil-lion. Owing to this, the reserve assets in 2008 increased by USD 1.1 billion5 and, as of January1, 2009, amounted to USD 31.5 billion which made it possible to finance import of goods andservices during 6.4 months of the future period (See Figure 29).

Figure 29. International reserves of the National Bank of Ukraine

1.2.2. External debt of Ukraine Having increased during the year by USD 21.7 billion or by 27.1 per cent (See Table 11) the

gross external debt of Ukraine, as of January 1, 2009, accounted for USD 101.6 billion (55.9per cent of GDP). The increase in the gross external debt resulted from growth of liabilities inthe banking sector by USD 8.5 billion or 27.4 per cent; by USD 7.9 billion or 25.6 per cent inother sectors of the economy; and by USD 4.3 billion or 10.2 times in the monetary authoritysector.

5 Irrespective of currency translation difference.

During 2008, the government debt grew by 27.6 per cent and, as of January 1, 2009, cameto USD 19.3 billion, including:

– Debt of the public administration sector for 2008 declined by USD 0.1 billion to USD 14.6billion (14.1 per cent of the gross external debt of Ukraine or 8.0 per cent of GDP);

– Debt of the monetary authority sector grew by USD 4.3 billion up to USD 4.7 billion; During 2008, the private debt rose by 27.0 per cent and, as of January 1, 2009, came to

USD 82.3 billion, including:– Private debt of the banking sector worth USD 39.4 billion (38.8 per cent of the gross exter-

nal debt or 21.7 per cent of GDP);– Private debt of other sectors of the economy worth USD 42.9 billion (42.2 per cent of the

gross external debt or 23.6 per cent of GDP).

Table 11. EXTERNAL DEBT OF UKRAINE (according to the IMF methodology)USD million

Indicators As of As of As of As of As of01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009

Public administration sector 14673 15135 14873 14152 14590Long-term 14673 15135 14873 14152 14590

Monetary authority sector 462 329 290 135 4725Long-term 462 329 290 135 4725

Banks 30949 33870 38450 42134 39424Short-term 11723 12059 12793 12884 9330Long-term 19226 21811 25657 29250 30094

Other sectors 30793 35129 37528 41333 38666Short-term 8955 11830 12931 14496 10970

Long-term 21838 23299 24597 26837 27696Direct investments:Inter-company debt 3079 3339 3727 4685 4249Gross external debt 79956 87802 94868 102439 101654

1.3. SURVEY OF THE WORLD ECONOMY ANDINTERNATIONAL MARKETS

In 2008, the world economy experienced the worst since the thirties financial shocks. Thefinancial crisis that started in September 2007 from the collapse of the mortgage lending mar-ket became deeper in the first half of 2008 and took some features of deep recession of theworld economy. One could see an essential decline in economic activities, growth of unem-ployment, credibility gap in both consumers and business circles, slump of prices for real estate,increase in the number of bankrupts among insurance and financial companies, collapse ofstock exchange indices, and dissolution of exchanges.

Growth of the world economy slowed down from 5.2 per cent, in 2007 to 3.4 per cent, in2008. Growth of the advanced economies reduced as well, in particular, in the USA from 2.0per cent, in 2007 to 1.3 per cent, in 2008; in Euro Zone from 2.6 per cent, in 2007 to 0.7 percent, in 2008; in Japan from 2.4 per cent, in 2007, to 0.7 per cent, in 2008.

The economic recession in the advanced countries influenced the developing or emergingmarkets because of slowing down of the world trade, outflow of private capital, and decline ininvestments. Thus, by estimate of the Institute for International Finance (IIF), the inflow of pri-vate funds to the emerging market economies reduced almost twice, from the historical maxi-mum of USD 929 billion, in 2007, to USD 466 billion, in 2008. Such additional factors as socialtension, speculations in the foreign exchange and capital markets aggravated the recession.

Consequently, the economic growth in the developing and emerging markets slowed downto 6.3 per cent, in 2008, which was 2.0 percentage points less than in 2007.

38

Annual Repor t 2008

The decline in the global demand and rise in the cost of financing of trade operations led toreduction in the world trade in goods and services from 7.2 per cent, in 2007, to 4.1 per cent,in 2008 (See Figure 30).

Figure 30. The world trade and economic growth (annual change)

Conditions in the world markets of raw materials were marked with a hike in prices, in thestructure of main commodity groups, registered its peak in the first half of the year. Prices forthe exchange commodities essentially grew, mainly due to the rise in prices for oil from 10.7 percent, in 2007, to 36.4 per cent, in 2008. The downfall of prices for raw material commoditiesadversely affected the exporters, for example, in 2008, GDP of the Russian Federation rose by5.6 per cent which was the lowest since 2002, significantly below the expectations, and GDP ofChina grew by 9.0 per cent.

In the second half of the year, because of decrease in the world demand the prices beganto sink to the level of 2006 and below, including, major Ukraine's exports (See Figure 31). Inparticular, prices for steel reduced because of a slump in prices for the expendable materials(energy resources, scrap metal) and decrease in demand (first of all, from the motorcar build-ing and construction industry).

Figure 31. Price dynamics of foodstuff and basic raw materials, index, year 2000 = 100

In 2008, one could see escalation of the consumer prices in both the advanced economiesand developing and emerging markets, by 1.4 percentage points and 2.8 percentage points,respectively (See Figure 32).

39


Figure 32. Consumer price dynamics (annual change)

Devaluation of national currencies was an additional challenge for the economic policymakers. Concurrent with a trend towards revaluation of US dollar as a world reserve currencywhich was reasonable under conditions of prevailing instability in the world financial markets,since the middle of 2008, the majority of currencies of the emerging markets have devaluated.Brazilian real lost by 21.9 per cent of its value, Russian ruble 19.7 per cent, Polish zloty 24.1per cent, Indian rupee 23 per cent, and Turkish lira 29.9 per cent. Among the reasons for thenational currency devaluations there were a decline in demand for the raw material resources(major export products of many of them) and the investment demand for risky assets.

Ukraine had the highest rate of risk premium growth and the most drastic fall of the stockexchange index among the emerging market economies. Spread of profitability of Ukraine'sEurobonds with respect to the USA's underlying assets expanded to 2735 basis points by theend of the year (nearly by 2500 basis points for the year against 451 basis points for this groupof countries, in average)6. Five-year credit default swaps for Ukraine (CDS) reached their max-imum and made up 3200 basis points, at the end of the year. The levels of credit default swapspointed to the essential probability of default which, in its turn, pushed up the panic expecta-tions of investors (See Figure 33).

Figure 33. Risk premium dynamics for Ukraine

40

Annual Repor t 2008

6 ÅÌÂ² index+ (Emerging Market Bond Issue +) spread is calculated by JPMorgan company as adifference between profitability of liquid Eurobonds of sovereign issuers and state-owned companiesof emerging market economies (Ukraine inclusive) and profitability of the US sovereign bonds withthe same maturity.

The PFTC index was falling with a higher pace (74.3 per cent) than MSCI of the emergingmarket economies7 that collapsed most swiftly for the whole period of its monitoring sinceDecember 2003 (by 47.1 per cent from the beginning of the year), and regional index (almostby 70 per cent) (See Figure 34).

Figure 34. Dynamics of stock indices of emerging market economies(31.12.2007 = 1)

Governments of different countries either together with or independently of the centralbanks began to implement the national programs for stabilization of their financial markets,renewal of lending, and stimulation of the economy growth. The national budgets and targetfunds of the countries and, in much less proportion, funds of the central banks were the basicsource of financing. Scrupulous harmonization and coordination of the government and centralbank economic policies and measures related to the exchange rate policy, interest rates, accu-mulation of liquid funds in the financial system, strengthening of prudential regulation in thefinancial sphere, recapitalization of the banking system, stimulation of lending, guaranty of prop-erty protection, in particular, deposits and pledged property were the key principle of imple-mentation of these programs.

Government guarantees, re-capitalization, recovery of confidence, and keeping of liquidityat a due level through refinancing credits were the main trends in policy for overcoming therecession after-effects. The governments of countries implemented a set of fiscal incentives,namely, budget measures of stimulant nature to intensify the inflow of foreign investments, stir-ring up of business activity and reactivation of trade. The international financial organizationshelped the countries suffered from the crisis both with making recommendations as to a way-out of the crisis and credits aimed at supporting the exchange rates of national currencies, inter-national reserves, and BOP.

Central banks changed the interest rates for preventing the threat of default on externaldebt servicing under conditions of probable national currency devaluation and high current andprobable inflation. Majority of the advanced economies reduced the refinancing rates of the cen-tral banks: the USA Federal Reserve System down to 0-0.25 per cent, the European CentralBank down to 2.5 per cent, the Bank of England down to 2.0 per cent; in this case, the ratesremained higher than the expected inflation and in some countries even higher than the realone (See Figure 35).

41


7 MSCI index for the emerging market economies is calculated by Morgan Stanley Capital Internationalon the basis of equity indices of 25 emerging market economies. It is calculated as an indicator ofdynamics of stock markets in emerging market economies.

Figure 35. Base interest rates of central banks of advanced economies

Other countries, mainly, the emerging market economies resorted to an increase in the refi-nancing rates of central banks: Romania by 2.75 percentage points since the beginning of2008, Russia by 3.00 percentage points, Belarus by 4.00 percentage points, Indonesia by 1.25percentage points, and Iceland by 4.25 percentage points (See Figure 36).

Figure 36. Dynamics of central bank refinancing rates in some countries

In the opinion of IMF experts, the existing drawbacks of the economic policy in the sphereof financial regulation, macroeconomics, and global architecture accounted for the market dys-function. The financial regulation was unfitted to large exposure concentrations and unreason-able incentives that led to rapid growth of financial innovations. The macroeconomic policy didnot take proper account of the increase in the systemic risks of the financial system and thehousing market. Fragmentation of the global supervision system aggravated incapacity todetect increasing vulnerability and interference of market participants.

42

Annual Repor t 2008

Part 2

ACTIVITIES OF THENATIONAL BANK OF UKRAINE

2.1. MONETARY POLICY2.1.1. Implementation of the monetary policy guidelines in 2008

In 2008, implementation of the monetary policy, with the use of a spectrum of mechanisms andinstruments, was directed towards achieving the aims and tasks determined by the Monetary PolicyGuidelines for 2008 (with amendments).

Variability of macroeconomic conditions, taking place during the reporting year, called for a prop-er flexibility on the part of the National Bank of Ukraine in conducting the monetary policy and a promptresponse to changes in the environment through considered application of monetary instruments andmechanisms. Development of the money and credit market during the previous year may be dividedinto two stages: the first one (January-September 2008) was marked by growth of the main monetaryindicators, and the second (October – December 2008) – by an essential deterioration of the situa-tion. At the first stage, deceleration of the monetary indicators growth displayed a moderate direction-ality of the monetary policy in the conditions of the necessity to decrease the inflation and to take pre-ventive measures for leveling the impact of external shocks on the money and credit system ofUkraine.

In spite of acceleration of the inflationary processes in the first half of 2008, the actions of theNational Bank of Ukraine with regard to regulation of the money supply volume were governed by thedynamics of the banking system liquidity combining the conduct of operations on money mobilization,as well as on the banks' liquidity support. Notwithstanding significant inflationary pressure, the vol-umes of operations on banks' liquidity support (UAH 64.1 billion for 9 months of 2008) were far inexcess of the volumes of the money mobilization operations (UAH 46.5 billion).

The anti-inflationary orientation of the monetary policy in the period mentioned had no detrimen-tal effect on banks' liquidity dynamics. Under the conditions of increase, during 9 months of 2008, ofthe monetary base by 20.4% and the money supply by 20.6%, during this period the volumes of fundson the banks' correspondent accounts augmented by 27.0%, which rendered proper credit support ofthe economic development processes by the banks. The growth rates of crediting by the banking sec-tor for 9 months amounted to 132.2%.

Over this period, the National Bank of Ukraine twice increased the discount rate (from 1 January2008 up to 10% per annum and from 30 April 2008 – to 12% per annum) and actively used the rateson mobilization operations, as well as increased the refinancing rates.

In spite of the positive dynamics of the monetary indicators during the first three quarters of 2008,considering the increase in macroeconomic risks and imbalances and within its competence, theNational Bank of Ukraine took measures to diminish their influence on the state of the money andcredit market. With this aim in view, the National Bank of Ukraine:

– strengthened the prudential ratios of activity of banks (including with regard to the capital ade-quacy requirements), stimulating them to making the agreements in the national currency and to amore weighted approach to the risk management;

– enhanced the capabilities of banks to support their liquidity, specifically through enlargement ofthe list of eligible collateral taken as security when providing the refinancing loans;

– augmented the international reserves that continued to enable to balance the demand on and sup-ply for the foreign currency in the period of aggravation of the situation in the foreign exchange market;

– tried, by way of taking measures in the area of foreign exchange regulation and strengtheningof the exchange rate flexibility, to mitigate the impact of the external shocks on the money and creditmarket and to balance the demand and supply in the foreign exchange market.

The mentioned actions ensured a significant basis for counteracting the crisis phenomena. Despite taking such measures, at the second stage of development of the money and credit mar-

ket the situation drastically deteriorated. The scale of aggravation of the situation in the economy andin the financial markets turned out to be larger than it had been anticipated. The situation in the mar-ket was essentially affected by artificially provoked mistrust of the households in the financial stand-ing of some banks and the banking system as a whole and by outflow of funds. The funds drawn fromdeposit accounts were transferred into cash and partially directed to the cash foreign exchange mar-

44

Annual Repor t 2008

ket, which decreased the resource base and reduced the credit activity of the banking system.

Required reserves Taking into account the factors that influenced the situation in the money and credit market, dur-

ing 2008, the National Bank of Ukraine deliberately used restrictive measures.During January – November 2008, the ratios for forming by banks the required reserves and the

level of required reserves to be kept daily at the operational day start on the correspondent accountwith the National Bank of Ukraine remained unchanged. In particular, the ratios of required reservesto be formed by banks were as follows:

– on time funds and deposits of legal entities and individuals in the national currency – 0.5%;– on time funds and deposits of legal entities and individuals in foreign currency – 4%;– on demand deposits of legal entities and individuals in the national currency and on funds on

the current accounts – 1%;– on demand deposits of legal entities and individuals in foreign currency and on funds on the cur-

rent accounts – 5%.The required reserve funds kept daily by an operational day start on a bank's correspondent

account with the National Bank of Ukraine, were imposed at a level of not less than 100% of theamount of the specified and formed required reserves for the previous reporting period of reserving.

In the period of aggravation of the situation in the financial market by the year end the NationalBank of Ukraine liberalized the requirements with regard to formation of the required reserves bybanks, in order to differentiate the required reserve ratios for fostering the deposit and credit agree-ments in the national currency. Since 5 December, 2008, the ratios of required reserves to be formedby banks were as follows:

– on time funds and deposits, on funds of demand deposits and on funds on the current accountsin the national currency – 0%;

– on time funds and deposits of legal entities and individuals in foreign currency – 3%;– on funds of demand deposits of legal entities and individuals in foreign currency and on funds

on the current accounts – 5%.The required reserve funds, kept daily by an operational day start on a bank's correspondent

account with the National Bank of Ukraine, were imposed at a level of not less than 90% of the amountof the specified and formed required reserves for the previous reporting period of reserving.

From 13 October to 5 December, 2008, the banks formed their required reserves with taking intoaccount balances of the funds in the national currency at the cashiers' desks and T-bills whoseredemption was due in 2008.

By the results of the decisions taken, in 2008, the average calculated ratio of required reservesamounted to 2.4%, or decreased from 2.4% in January to 2.2% in December (for 2007 it was 2.1%and augmented from 2.1% in January to 2.4% in December).

During 2008, the required reserves, formed by the banking system, augmented from UAH 10.2billion in January to UAH 13.7 billion – in December. During the year, the average balances of fundson the banks' correspondent accounts ranged from UAH 14.7 billion to UAH 21.0 billion.

Interest ratesDuring 2008, the interest rate policy of the National Bank of Ukraine was carried out adequately

to the situation in the money and credit market and it was aimed at disabling the inflationary process-es in the economy from strengthening.

In order to restrain the inflationary pressure and to prevent the imbalance deepening within thestructure of active and passive operations of the banks, from 1 January, 2008, the National Bank ofUkraine increased the discount rate from 8.0% per annum up to 10.0% per annum, and from 30 April,2008, – up to 12.0% per annum.

To promote the savings activity of households in January-September, as well as to bring the fundsback to the banking system whose outflow had place in the 4th quarter of 2008, the National Bank of

45

Act iv i t ies o f NBU

Ukraine took measures concerning the increase in the value of the national currency by raising theinterest rates on active and passive operations.

While on the whole for the year the average weighted interest rate on all refinancing instrumentsaugmented to 15.3% annually (compared with 10.1% per annum for 2007), in December it changedmodestly as compared with January – by 0.2 percentage point to 14.8% annually in December, includ-ing on:

– overnight credits – by 5.1 percentage points (from 14.6% annually in January to 19.7% annu-ally in December);

– refinancing credits, extended on tender results – by 2.8 percentage points (from 15.5% annu-ally in January to 18.3% annually in December).

For 2008, the average weighted interest rate on the operations of exchange of foreign currencyfor the national currency (swap) amounted to 15.1% per annum, on direct repo operations (calculat-ed) – 13.8% per annum and on short-term loans extended to the banks in September-December 2008under the financial rehabilitation programs – 14.1% per annum.

Refinancing of banksDuring 2008, the National Bank of Ukraine ensured the support of banks' liquidity by provision of

overnight credits through the permanently acting refinancing line and of refinancing credits for a termof up to 14 days and up to 365 days, as well as stabilization credits, direct repo operations and oper-ations on the exchange of foreign currency for the national currency to support the banks' liquidity(swap).

In October 2008, in order to mitigate the impact of the external financial crisis and to ensure sta-bility of banks, the National Bank of Ukraine, in line with Board Decision No.319 of 11 October 2008"On Additional Measures Concerning the Banks' Activities" introduced a liquidity support mechanismbased on the financial rehabilitation programs for a term up to 1 year and the operative support of thebanks' liquidity.

By the results of the measures taken by the National Bank of Ukraine in order to prevent the cri-sis phenomena in the banking system, Decision No.413 of the Board of the National Bank of Ukraine,dated 4 December 2008, "On Some Aspects of the Banks' Activities" was approved which abolishedthe liquidity support mechanism based on the financial rehabilitation program.

At the year end, the Temporary Regulations on Granting Loans by the National Bank of Ukraine(Decision No.459 of the Board of the National Bank of Ukraine, dated 25 December 2008) wereapproved. To support the banks' liquidity in the case of a real danger for the banking system stability,a procedure was defined for extending the loans by the National Bank of Ukraine to the banks in con-nection with worsening of their liquidity reasoned by instability and fall in the exchange rate of hryvnia,other circumstances that brought about an essential reduction of solvency of a large part of banks ortheir borrowers.

In 2008, the credits for refinancing of banks totaled UAH 169.5 billion (in 2007 – UAH 2.5 billion).At that, using the permanently acting mechanism of the credit line for banks' refinancing, the NationalBank of Ukraine extended the overnight credits to the amount of UAH 91.8 billion, or 54.2 % of thetotal refinancing (in 2007 – UAH 0.4 billion, or 17.1 %), the credits received by banks through the ten-der – UAH 15.2 billion, or 9.0% (in 2007 – UAH 2.0 billion, or 78.0%), through the direct repo opera-tions – UAH 23.1 billion, or 13.6%, through operations on exchange of foreign currency for the nation-al one for the support of banks' liquidity (swap) – UAH 2.6 billion, or 1.5%, by provision of short-termloans based on the financial rehabilitation program – UAH 36.8 billion, or 21.7% of the total refinanc-ing. For this period, the banks repaid the refinancing credits to the total amount of UAH 110.4 billion ( in 2007 – UAH 2.1 billion).

Deposit operations For the purpose of operative regulating the banks' liquidity and ensuring the equilibrium in supply

of the money funds and demand for them, during 2008, the National Bank of Ukraine performed thedeposit operations with banks through the placement of deposit certificates of the National Bank ofUkraine.

46

Annual Repor t 2008

With this aim in view, announced were 641 tenders by whose results the deposit certificates atthe nominal value of UAH 1 000 thousand were placed to the total amount of UAH 57.2 billion (in 2007– UAH 109.6 billion). The interest rates on the funds attracted through deposit certificates were set inaccordance with the general situation in the money and credit market with due regard for the interestrates on credits and deposits in the interbank market. The average weighted interest rate on the fundsattracted on the deposit certificates in 2008 was 3.9% annually (in 2007 – 0.7% annually).

In 2008, advanced repayment of the deposit certificates to the amount of UAH 1.6 billion wasmade.

2.1.2. Non-cash emission by the National Bank of UkraineDuring 2008, in accordance with the authorities delegated by the laws of Ukraine, the National

Bank of Ukraine made the primary emission of the national currency in a cashless form through threechannels: foreign exchange (currency purchase in the interbank market for leveling the fluctuations ofthe exchange rate of the national currency and replenishing the international reserves), credit (refi-nancing of banks to support their liquidity) and stock exchange one (making the operation on pur-chase-sale of government securities in the secondary market in order to balance the demand andsupply in the money and credit market). While in 2007, within the structure of emission operations, theperformance of operations through the foreign exchange channel prevailed (nearly 95% of the totalcashless emission made), then in 2008 – through the credit channel (about 80%). In the conditions ofemerging tension in the financial market, starting from October 2008, the foreign exchange channelwas used mainly for drawing out the money from circulation, since the National Bank of Ukraine car-ried out the operations on selling the foreign currency. At the same time, the outflow of funds from thedeposit accounts of banks took place, which significantly influenced their liquidity. In such conditions,the National Bank of Ukraine enhanced the volumes of the banks' liquidity support through the refi-nancing mechanisms, which increased the share of operations with use of the credit channel withinthe emission operation structure.

During 2008, the National Bank of Ukraine issued into circulation the funds totaling UAH 218.2billion, which was UAH 174.3 billion, or nearly 5.0 times more, than in 2007, including:

– UAH 169.5 billion (in 2007 – UAH 2.5 billion) to support the banks' liquidity through different refi-nancing mechanisms, which amounted to 77.7% of the non-cash emission;

– UAH 40.1 billion (in 2007 – UAH 41.4 billion) to acquire the foreign currency in the interbankmarket for forming the international (gold and foreign exchange) reserves of the National Bank ofUkraine, which amounted to 18.4% of the non-cash emission;

– UAH 8.6 billion, or 3.9% of the non-cash emission, to acquire the government securities ofUkraine in the secondary market.

Within the structure of the non-cash emission, made by the National Bank of Ukraine, in 2008,the share of funds directed to the banks' liquidity support augmented by 71.9 percentage points dueto the reduction in liquidity of some banks starting from October 2008 in view of the outflow of fundsfrom the deposit accounts, as well as owing to the active operations of the National Bank of Ukraineon the foreign currency sale.

In 2008, the emission funds totaling UAH 179.6 billion, that is 44.0 times more than in 2007, werewithdrawn from circulation by the National Bank of Ukraine. The emission funds withdrawal was car-ried out by way of the repayment by banks of the refinancing credits, extended earlier, to the amountof UAH 110.4 billion (61.5% of the total sum of the funds withdrawn), the sale of foreign currency bythe National Bank of Ukraine to the amount of UAH 69.1billion (38.4%), as well as at the expense ofoperations on repayment of the external government loan securities worth UAH 129.2 billion (0.1%).

Net non-cash emission (difference between the funds put into circulation and those withdrawnfrom circulation) in 2008 equaled UAH 38.6 billion and was by UAH 1.2 billion, or by 3.0% more thanin 2007.

As at 1 January 2009, the non-cash emission of the National Bank of Ukraine accounted for UAH181.4 billion, that is by UAH 38.6 billion, or by 27.0% more than as at 1 January 2008.

47


2.1.3. Money circulationBy the results of 2008, the National Bank of Ukraine carried out the discreet money and credit pol-

icy aimed at ensuring the stability of the national monetary unit by way of balancing the moneydemand and supply and preventing the monetary factor influence on the inflationary processes. As at1 January 2009, the monetary base equaled UAH 186.7 billion8 and augmented for 2008 by 31.6%(in 2007 – by 46.0%). In total, for 2008, the monetary base grew by UAH 44.8 billion. At the sametime, the liabilities of the National Bank of Ukraine to the banking sector, not included in the monetaryaggregate M3 (the banks' funds on the correspondent accounts with the National Bank of Ukraine),diminished by UAH 0.4 billion (by 2.2%) to UAH 18.6 billion.

As at 1 January 2009, the estimated level of temporally free liquidity of the banking systemwas UAH 5.0 billion against UAH 9.3 billion as at 1 January 2008.

In the reporting year, the direction of the National Bank of Ukraine operations concerningthe banks' liquidity regulation was defined on the basis of the liquidity dynamics in the bankingsystem. In particular, at the start of 2008, a high level of free liquidity was noted due to signifi-cant budgetary payments in December 2007. Under such conditions, the National Bank ofUkraine mainly performed operations on mobilization of the banks funds. Later on, noted wasthe banks' liquidity augmentation, above all due to accumulation of considerable funds on theSingle Treasury Account (in January-September 2008 the funds of the Government of Ukrainein the national currency on accounts with the National Bank of Ukraine increased 3.6 times upto UAH 15.9 billion), and the National Bank of Ukraine more actively supported the banks' liq-uidity through the refinancing operations (see Figure 37).

Figure 37. Funds of banks on correspondent accounts with the National Bank of Ukraine

During 2008, the money multiplier value reduced from 2.79 to 2.76 which reflected the outflow offunds from deposit accounts during the last quarter of the previous year and the decrease in thebanks' crediting activity.

During the reporting year, downward dynamics of the monetary aggregate Ì3 (in the annualizedcalculation) was seen. As at 1 January 2009, the money supply in circulation amounted to UAH 515.7billion. For 2008, the growth rates of money supply were the lowest for the last ten years and corre-sponded to 130.2% (see Figure 38).

As at 1 January 2009, the money velocity decelerated to 2.08 compared with 2.19 as at 1 January2008, alongside the increase in the calculated economy monetization up to 48.00% compared with45.60% at the year beginning.

48

Annual Repor t 2008

8 As at December-end 2008, the National Bank of Ukraine ensured observance of the quantita-tive criteria of efficiency on the monetary base of the Stand-by Program (not more than UAH 190billion) supported by the International Monetary Fund.

In 2008, the money supply in the national currency enlarged by 16.9% (in 2007 – by 60.5%), inforeign currency – by 75.2% (the previous year – by 28.1%). The significant growth of money supplyin foreign currency was primarily due to reduction of the exchange rate of hryvnia against main for-eign currencies. At that, the share of money supply in the national currency diminished for the yearfrom 77.2% to 69.4% with appropriate growth of the money supply share in foreign currency.

Figure 38. Money supply dynamics

As at 1 January 2009, within the money supply, the money in cash outside the banksamounted to UAH 154.8 billion and grew for 2008 by 39.3% (by UAH 43.6 billion), though com-pared with 2007 (148.2%) its growth rates slowed down. During the year, the largest indicatorof the cash augmentation was noted in December of the reporting year – by 9.5% due to sharpspending of funds of the Government of Ukraine in the national currency (funds of theGovernment of Ukraine in the national currency on the accounts with the National Bank ofUkraine diminished by UAH 9.3 billion for the month) and a seasonal increase in payments ofsalaries, premiums, etc at the end of the year. The mentioned had also some influence duringthe last month on the growth of the cash share within the total monetary aggregate Ì3 (by 0.8percentage point). On the whole, for 2008, the share of money in cash outside the banks with-in monetary aggregate Ì3 augmented by 2.0 percentage points and, as at 1 January 2009,equaled 30.0%.

By December-end 2008, the balances of other deposits in foreign currency attracted intothe banking system amounted to UAH 122.5 billion and increased for the reporting year by75.9%, primarily at the expense of augmenting the funds of the households' sector – by 68.7%.By the results of 2008, the funds on other deposits in foreign currency that belonged to the sub-sector of other financial corporations grew 5.3 times, however, due to their insignificant sharewithin total monetary aggregate Ì3, this had no essential influence on the general dynamics ofother deposits in foreign currency.

At the end of the reporting year, balances on the transferable deposits in foreign currencyamounted to UAH 35 billion, or enlarged for 2008 by 73.0% due to their growth on the accountsof institutional units of the non-financial corporations sector by 87.4% and the households' sec-tor by 68.7%.

During 2008, the growth dynamics of other deposits in the national currency were uneven.Thus, during the first three quarters, there was a tendency towards their increase (by 25.9%),but, in the 4th quarter, on account of dampening of the economic activity and uncertainty withregard to further dynamics of the exchange rate of hryvnia against the main foreign currencies,other deposits in the national currency diminished by 13.9% to UAH 129.9 billion. This had an

49


UAH

, bln

.

impact on the slowdown in the growth rates of other deposits in the national currency for theyear as a whole (in 2008 – to 108.5% versus 181.5% – in 2007). The mentioned funds growthwas at the expense of other deposits in the national currency belonging to the households' sec-tor which augmented for 2008 by 68.7%.

A restraining factor for the rise in monetary aggregate M3 in 2008 was the outflow of trans-ferable deposits in the national currency (by 0.3%), in particular the funds of corporations of thesubsector of other financial corporations – by 15.8% and the households' sector – by 11.1% ona reason of artificially provoked failure of trust of the population to the financial situation of somebanks and the banking system as a whole. At the same time, the funds of transferable depositsin the national currency of the sector of non-financial corporations increased for the year by12.3%.

2.1.4. Cash circulationAs at 1 January, 2009, the cash outside the banks equaled UAH 154.8 billion and during

2008 it increased by UAH 43.6 billion, or by 39.3% (for 2007 – by UAH 36.1 billion, or by48.2%). The cash growth was primarily reasoned by the increase in social guarantees andsalary payments to the population.

Moreover, the aggravation of tension in the world financial markets and artificially provokeddistrust to some depository corporations caused outflow of funds from the banking system inOctober 2008 – during the month, the volume of cash outside the banks went up by UAH 12.7billion (specifically in the first decade of October – by UAH 8.3 billion). In order to ensure sta-ble functioning of the banking system and to reduce the impact of the financial crisis, theNational Bank of Ukraine took a number of measures, prevention of the funds outflow from thebanking system among them. In November, the cash funds already diminished by UAH 4.9 bil-lion. The highest increase in cash was noted in December (by UAH 13.4 billion). It was a sea-sonal phenomenon and related to an essential decrease of the Government's funds in thenational currency on the accounts with the National Bank of Ukraine and advanced paymentsof salaries and other social payments. The share of cash outside the banks within the moneysupply grew for 2008 by 2.0 percentage points to 30.0% (see Figure 39).

Figure. 39. Share of cash (Ì0) in money supply (Ì3)

The level of cash concentration in circulation amounted to 4.1% compared with 4.6% in 2007. Under conditions of accelerated inflationary processes, the tendency towards an increase in both

the issue of cash from the cashiers' desks and its return to them persisted. The returns of cash to the cashiers' desks of banks in 2008 equaled UAH 1014.7 billion and grew

compared with 2007 by UAH 260.1 billion, or by 34.5%. Within the returns to the cashiers' desks ofbanks, 46.0% were receipts from the trade network enterprises and the enterprises providing all thetypes of paid services. Their proceeds compared with 2007 rose by UAH 124.4 billion, or by 36.4%,which was primarily caused by rise in the consumer price index and growth of the retail turnover. Alsoincreased were incomings to the accounts on individuals' deposits (by UAH 47.8 billion, or by 45.1%),as well as on the payment cards (by UAH 28.4 billion, or by 86.6%).

50

Annual Repor t 2008

The issues of cash from the cashiers' desks of banks of Ukraine for 2008 totaled UAH 1058.3 bil-lion and augmented, compared to 2007, by UAH 267.6 billion, or by 33.9%. The largest was thegrowth of payments on payment cards (by UAH 118.1 billion, or by 56.3%), from the accounts ondeposits of individuals (by UAH 83.5 billion, or by 49.1%). At the same time, significantly lower werethe growth rates of issue of cash for the acquired foreign currency, for 2008 its volume augmented byUAH 8.0 billion, or by 5.8%, whereas for 2007 the increase equaled UAH 57.8 billion, or 72.0%.

During 2008, the National Bank of Ukraine secured the needs of the economy in cash moneywithin necessary volumes and optimal denomination composition of banknotes and coins. For thispurpose, the continuous analysis and control of the cash supply at the regional branches' stocks (time-ly cash support and cash excess taking out) and balances of banknotes and coins in the reserve fundsof the National Bank of Ukraine were carried out. In 2008, the support of the regional branches withbanknotes and coins from the reserve funds totaled over UAH 80.7 billion, which is by UAH 27.0 bil-lion more than in the previous year. Alongside, replenishment of the cash stock at the regional branch-es through reallocation of cash between them increased. The total value of such supports in thereporting year made up UAH 6.8 billion, against UAH 7.2 billion in 2007.

By the end of 2008, in circulation there were 2520.9 million pieces of banknotes and 7398.6 mil-lion pieces of change and circulating coins (as at 1 January 2008– 2202.3 and 6549.3 million pieces,respectively). By the reporting date, there were 54 pieces of banknotes per capita and 152 pieces ofchange and circulating coins per capita of all denominations (as at 1 January, 2008, 47 pieces and134 pieces per capita, respectively).

In order to maintain the proper view of the banknotes put in circulation, the worn cash was with-drawn from circulation. In 2008, withdrawn were the worn banknotes to the amount of 868.8 millionpieces (against 771.3 million pieces in 2007).

In 2008, the banking institutions of Ukraine found out and withdrew from circulation 6.4 thousandpieces of false banknotes of the national currency (by 27.0% more than in 2007) for the total value ofUAH 420.1 thousand (by 45.0% more compared to 2007), with a prevailing share of banknotes of 20,50 and 100 Hryvnia denominations, being respectively 24.3%, 24.6% and 21.3% of the total amountof false banknotes revealed in circulation. Nearly 99% of the false banknotes were those producedwith the use of reproducing equipment in the jet and laser printers.

743 pieces of US dollar banknotes amounting to over USD 71.8 thousand, 194 pieces of Eurobanknotes for the value of over EUR 34.5 thousand, and 282 pieces of Russian rubles for the valueof 288.6 thousand rubles were acknowledged false and withdrawn from the banking system. Over90% of the false US dollar and Euro banknotes and 13% of the false Russian rubles withdrawn wereproduced by the printing technology.

In accordance with the approved Plan for Issuing the Commemorative and Jubilee Coins ofUkraine, in 2008, produced were 40 names of commemorative and jubilee coins (44 types), including6 golden, 19 silver and 19 non-precious metal coins.

Alongside, in the reporting year, an essential work was arranged on selling the commemorativeand jubilee coins, numbering 916.3 thousand pieces for the total value of nearly UAH 92.7 million.

To further upgrade the organization of cash circulation and to perfect the legislative and norma-tive provision of operations with cash, in 2008, the National Bank of Ukraine approved the Concept ofImproving the Organization of Work with Cash within the System of the National Bank of Ukraine for2008–2012, the Instruction on Organizing the Issue and Cash Work within the System of the NationalBank of Ukraine, made were amendments to the Instructions: On Organizing the Work with Valuablesin the Central Vault of the National Bank of Ukraine, as well on Organizing the Foreign ExchangeValuables Transportation and Money Collection in the Banking Institutions of Ukraine. Moreover, sin-gle tariffs for the banks' cash servicing were defined that permitted to create equal servicing conditionsin all the regions of Ukraine.

51


2.2. EXCHANGE RATE POLICY2.2.1. Dynamics of the exchange rate of Hryvnia.

Real effective exchange rateIn 2008, the dynamics of the exchange rate of hryvnia versus foreign currencies offered more flex-

ibility. At that, evident were significant changes not only in levels of the interbank and cash exchangerate but also of the official exchange rate of hryvnia (see Table 12).

Table 12. THE OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGN CURRENCIES(per 100 units of currency, nominal and real changes: "–" – devaluation, "+" – revaluation)

For reference:Rate of hryvnia against foreign currencies (by the year end) 2008 2007

against the US dollar 770.0 505.0nominal change (%) –52.5 0real change (with regard to the inflation difference, %) –18.5 +12.0Against Euro 1085.546 741.946nominal change (%) –46.3 –11.6real change (with regard to the inflation difference, %) –13.5 –2.2Against Russian ruble 26.208 20.579nominal change (%) –27.4 –7.3real change (with regard to the inflation difference, %) –17.7 –2.6For reference: the consumer price index versus December of the previous year (%) 122.3 116.6

During January-August 2008, stable revaluation pressure on hryvnia both in the interbank andcash foreign exchange market was noted.For this period, the exchange rate of hryvnia against the US dollar in the foreign exchange mar-ket revaluated (see Figure 40):– average weighted one on cashless transactions from UAH 503.29 to UAH 464.21 per USD 100;– on cash transactions:

of purchasing the US dollar – from UAH 504.65 to UAH 462.46 per USD100; of selling the US dollar – from UAH 507.59 to UAH 466.59 per USD100.

52

Annual Repor t 2008

Figure 40. Dynamics of exchange rate of Hryvnia against US Dollar in 2008

The stable appreciation of hryvnia both in the interbank and cash markets, as well as neces-sity to reduce the inflationary pressure, reasoned by augmentation of social payments, result-ed, since 22 May, 2008, in the revaluation of the official exchange rate of hryvnia against theUS dollar by 3.96% (to UAH 4.85/USD1).

Starting from September 2008, the situation in the foreign exchange market altered. Againstthe background of the world economic crisis deepening, a significant curtailment of export rev-enues on a par with complication of the access to external lending took place, which caused thedeficit of foreign currency in the internal market. The above mentioned had an adverse effect onthe exchange rate dynamics of hryvnia versus the basic foreign currencies: devaluation of its offi-cial exchange rate, as well as of the exchange rate in the interbank and cash markets. For 2008as a whole, the official exchange rate of hryvnia against the US dollar reduced by 52.5%.

The dynamics of the exchange rate of hryvnia versus other world currencies mirrored theconjuncture of international markets. During the year, the US dollar against the euro revaluat-ed by 8.6 %. The hryvnia devaluated respectively against the euro by 46.3 %, and against theRussian ruble – by 25.4%.

Real effective exchange rate (REER) of hryvnia In 2008, the REER of hryvnia decreased, compared to December of 2007, by 14.8% (see

Figure 41). During the reporting year, the dynamics of the REER of hryvnia was uneven: inJanuary – October it grew by 18.4 % due to strengthening of the nominal effective exchangerate (NEER) of hryvnia (by 7.3%), as well as to excess by 11.1 percentage points of the infla-tion in Ukraine over its level in the countries – main trade partners.

Figure 41. Dynamics of UAH REER

However, the hryvnia devaluation that started in October of 2008 caused the reduction of theREER of hryvnia. Thus, for November – December 2008 the REER of hryvnia diminished by32.0%. Moreover, considerable difference in inflation in Ukraine and other countries contributedto a moderate reduction of the real effective exchange rate of hryvnia by the year results.

2.2.2. Development of the foreign exchange market of UkraineIn 2008, in the foreign exchange market of Ukraine there were fluctuations of demand for

and supply of foreign currency. Thus, during January-August, in the interbank market a stableexcess of foreign currency supply over its demand was noted. At that, the incomings of foreigncurrency from non-residents augmented, compared to the similar period of the previous year,by 31.3%, and its supply in the interbank foreign exchange market enlarged by 48.5%.

53


The National Bank of Ukraine adjusted the exchange rate primarily through the purchase offoreign currency. During January-August 2008, foreign currency interventions totaled USD 6.6billion. By August-end, the international reserves equaled over USD 38 billion and had enlargedsince the beginning of 2008 by USD 5.6 billion.

Starting from September of the reporting year, the interbank market of Ukraine exhibited theforeign currency deficit that was reasoned by aggravation of the world financial crisis and bydecrease in external consumption which provoked reduction of the foreign exchange proceedson export operations of residents and on their external borrowings. As a consequence, dailyincomings of foreign currency on the accounts of enterprises reduced from USD 595 million inAugust to USD 357 million in December 2008 (see Figure 42).

Figure 42. Dynamics of interbank foreign exchange market indicators

To minimize the foreign currency deficit and to diminish the devaluationary pressure on hryv-nia, during the 4th quarter, the National Bank of Ukraine carried out active foreign currency inter-ventions by selling of USD 10.3 billion. In 2008, the balance of foreign currency interventions of theNational Bank of Ukraine equaled "minus" USD 3.9 billion versus "plus" USD 7.6 billion in 2007.

In the cash segment of the foreign exchange market, in 2008, there was mainly the excessof demand for foreign currency in cash that accounted for USD 6.1 billion against USD 4.4 bil-lion in 2007 (see Figure 43).

Figure 43. Volume of operations on cash FX market of Ukraine (in daily average calculation)

In 2008, the majority of transactions on the foreign currency purchase and sale were car-ried out in the cashless segment of the foreign exchange market (see Table 13).

54

Annual Repor t 2008

Table 13. STRUCTURE OF THE FOREIGN EXCHANGE MARKET OF UKRAINE ON OPERATIONS OF THE FOREIGN CURRENCY PURCHASE AND SALE

(%)Year Non-cash Cash

market market

2004 81.1 18.92005 78.4 21.62006 73.3 26.72007 70.8 29.22008 75.9 24.1

At that, in 2008, in the non-cash foreign exchange market there was the increase in theshare of transactions with US dollars by 4.0 percentage points to 77.7% and the decrease inthe share of transactions with euros and Russian rubles. On the transactions with foreign cur-rency in cash the tendency was opposite: the share of operations with US dollars diminished by7.7 percentage points to 71% with appropriate growth of the share of transactions with eurosand Russian rubles (see Table 14).

Table 14. STRUCTURE OF OPERATIONS ON THE FOREIGN CURRENCY PURCHASE ANDSALE ON THE INTERBANK AND CASH SEGMENTS OF THE FOREIGN EXCHANGE MARKET OF UKRAINE

Interbank foreign exchange market2004 77.7 79.1 11.5 5.9 3.52005 91.4 80.6 12.5 5.8 1.12006 102.4 77.7 14.1 6.8 1.42007 148.0 73.7 16.4 6.9 3.02008 208.8 77.7 14.2 6.0 2.1

Cash foreign exchange market2004 18.1 80.8 12.9 4.8 1.52005 25.2 79.6 14.0 4.7 1.72006 37.3 82.0 12.1 4.2 1.72007 61.1 78.7 15.2 4.5 1.62008 66.2 71.0 22.0 5.4 1.6

2.2.3. Improvement of the foreign exchange system regulation.Preventive measures with regard to outflow of foreign currency abroad

During January – September of 2008, improvement of the foreign exchange regulation ratioswas aimed at optimizing the functioning of the interbank foreign exchange market of Ukraine, theinterrelations between banks and their customers in performing the operations on purchase andsale of foreign exchange valuables, which enabled the National Bank of Ukraine to implement, inthe real time mode, the monitoring of demand for and supply of foreign currency in the interbankforeign exchange market of Ukraine, to ensure the speed-up of crediting the receivers' accountson international transactions, to simplify for individuals the procedure of making transfers of for-eign exchange funds outside Ukraine and to adapt to the EU legislative ratios the requirementsrelated to transferring the foreign exchange valuables across the border of Ukraine.

55


YearUSD

Total volume oftransactions,

USD, bln.(in the dollar equivalent)

Euro Russianruble

Othercurrencies

Structure by currency types, %

To neutralize the negative consequences of the world financial crisis, starting from October2008, a number of decisions were approved by the Board of the National Bank of Ukraine:No.216 "On Approval of the Regulations about the Order of Fulfillment by the Banks ofDocuments for Transfer, Forced Write-off and Arrest of Funds in Foreign Currencies andBanking Metals and Amendments to Some Normative and Legislative Acts of the National Bankof Ukraine" dated 28.07.2008; No.319 "On Additional Measures Related to Activity of Banks"dated 11.10.2008; No.336 "On Making Amendments to the Regulations on the Order and Termsof the Foreign Currency Trade" dated 23.10.2008; No.413 "About Some Aspects of Banks'Activity" dated 04.12.2008, aimed at prevention of the unreasonable outflow of foreign curren-cy abroad, as well as at mitigation of negative market expectations

Staring from 4 November, 2008, 5-day mandatory term of placement on a separate analyt-ic account of a bank's balance account of the customers' funds intended for purchase of foreigncurrency in order to return foreign investments (or investment income) outside of Ukraine, thatcontributed to strengthening the control of such operations by banks.

At the same time, in accordance with the resolution of the National Bank of Ukraine, dated18.12.2008, No.435 "On Functioning of the Non-Cash Interbank Foreign Exchange Market ofUkraine", set was a new order of functioning of the interbank foreign exchange market ofUkraine with introduction of prohibition of speculative operations with foreign currency by banksbetween themselves, that contributed to limitation of demand for foreign currency.

To improve the transparency of foreign exchange interventions by the National Bank ofUkraine, since December 2008, foreign exchange auctions were initiated.

In the context of commitments to the European Union (EU) taken by Ukraine with regard tosimplification of the procedure of investing the funds of residents of Ukraine into the EU coun-tries, improved was the order of issuing by the National Bank of Ukraine of individual licenses formaking the investments abroad (Instruction on the Order of Issue of Licenses for Making theInvestments Abroad, approved by decision of the Board of the National Bank of Ukraine No.122,dated 16.03.1999), in particular, regarding the cut in the number of documents needed to obtainan appropriate license, and the abolishment of some requirements for their execution.

To improve the system of regulating the export-import of lending capital and to upgrade themonitoring of short-term external loans of authorized banks aimed were amendments to theOrder of Getting the Credits, Loans in Foreign Currency by Residents from Non-Residents andto registration of the agreements that became effective since 1 January 2008 and in whoseaccordance introduced was the registration of agreements about getting the short-term loansby authorized banks from non-residents.

As for using the preventive measures, in 2008, in the conditions of unwinding of the worldfinancial crisis, the National Bank of Ukraine applied a wide spectrum of appropriate instru-ments and mechanisms for foreign exchange regulation of the capital export-import.

To limit the short-term external loans, being of extra instability and able, as a result, to pro-voke essential foreign exchange imbalances, temporarily (from 01.08.2008 to 13.10.2008)introduced was 20-percent provisioning9 by banks of funds under the short-term external loansand the deposits for a term not more than 183 days.

With due consideration of rising in price of borrowings in the external capital markets, thatmade complicated their volume support by banks on reasonable terms, from 27 October 2008,the limitations, concerning the marginal cost of external borrowings of residents in foreign cur-rencies of Group 1 of the Classifier of Foreign Currencies and Banking Metals, were appliedonly to the short-term credits and loans – not more than 11% per annum.

56

Annual Repor t 2008

9 Decision of the Board of the National Bank of Ukraine of 18.06.2008, No.171 "On Approval of the Rules of Reserving the Funds under Attracted by the Authorized Bank of Deposits and Credits(Loans) in Foreign Currency from Non-residents ", amended.

2.2.4. International reservesAs at 1 January 2009, the international reserves amounted to USD 31.5 billion and reduced

for the year by USD 0.9 billion, or by 2.8%. In August 2008, the volume of international reserveswas the largest and equaled USD 38.0 billion.

The primary source of the international reserve growth were interventions of the NationalBank of Ukraine that resulted in acquiring USD 7.0 billion (in the dollar equivalent) in the inter-bank foreign exchange market, during 2008. At the same time, in the 4th quarter of the report-ing year, in the conditions of worsening of the situation in the foreign exchange market ofUkraine, the National Bank of Ukraine sold foreign currency to the total amount of UAH 10.3 bil-lion (in the dollar equivalent) (95% of the total foreign currency sold for the reporting year),which caused the reduction in international reserves as a whole (see Figure 44).

Among the sources of replenishing the international reserves there were the funds receivedfrom the International Monetary Fund to the amount equivalent to SDR 3 billion, or USD 4.6 billion.

Figure 44. International reserves and interventions of the National Bank of Ukraine

An additional factor of the international reserve growth was the yield obtained from the inter-national reserve management that in 2008 amounted to USD 1.9 million.

The main aim of the international reserve management was ensuring an optimum relation-ship of the levels of international reserve security, liquidity and yield that provided for the fulfill-ment by the National Bank of Ukraine of its functions defined by the effective law of Ukraine..

In the reporting year, the National Bank of Ukraine carried out the international reservemanagement in line with "The Investment Declaration of the Gold and Currency Reserve of theNational Bank of Ukraine for 2008" to receive an additional yield.

In 2008, the international reserves were kept on the accounts of banks-correspondents, aswell as in the financial instruments with the long-term credit rating not lower than "A". The cred-it risk control was ensured through establishing the credit limits to banks-counteragents. Theoptimum foreign exchange and interest risks were provided through diversification of interna-tional reserves. The larger portion of the international reserves was put into government secu-rities of the industrially developed countries, as well as kept in the banks of the USA,Switzerland and Great Britain.

All the obligations of banks-counteragents to the National Bank of Ukraine on deposits andoperations with securities were timely and fully performed.

The international reserve liquidity was defined by the liquidity level of hard currencies, finan-cial instruments or of the financial market.

In the process of managing the international reserves the National Bank of Ukraine usedthe main financial instruments like short-term deposits and securities.

57


In order to enlarge the assets with high liquidity, in 2008, the share of securities within theinternational reserve structure was raised (from 47% to 52%).

The larger portion of the monetary gold of the National Bank of Ukraine was kept at theState Vault, and the rest was placed as the long-term deposits.

The total average yield of transactions on the international reserve management for 2008amounted to 5.4%.

In the reporting year, the international reserve growth was accompanied by timely repay-ment and servicing of the external state debt.

2.3. DEVELOPMENT OF THE BANKING SECTOR OF UKRAINE 2.3.1. Indicators of activities of the banks of Ukraine

In 2008, activity of the banking sector of Ukraine was under the effect of the macroeconomicsituation and the consequences of the world financial crisis that were intensifying during the year.

In 2008, noted was the increase in the ratio of the banks' assets to the GDP, that as of 1January 2009 amounted to 102.4% (as at 1 January 2008 – 84.5%), the loans to the GDP –83.4% (as at 1 January 2008 – 68.4%), the liabilities to the GDP – 84.9% (as at 1 January 2008– 74.7%) (see Figure 45).

Figure 45. Main indicatiors of activity of Ukrainian banks

The banks' assets and liabilities growth was, to some extent, influenced by the decline inthe exchange rate of hryvnia against the main foreign currencies in the 4th quarter of 2008.

For 2008, the total assets of banks of Ukraine augmented by 54.5% (for 2007 – by 75.3%)and as at 1 January 2009 equaled UAH 973.3 billion. Within the banks' assets, the share ofloans amounted to 81.4% (as at 1 January 2008 – 78.4%), highly liquid assets – 8.2% (as at 1 January 2008 – 10.3%), investments in securities – 4.2% (as at 1 January 2008 – 4.6%), fixedassets and intangible assets – 4.0% (as at 1 January 2008 – 4.5%), other assets – 2.2% (as at1 January 2008 – 2.2%).

For the reporting year, the total liabilities of banks augmented by 52.3% (for 2007 – by78.0%) and as at 1 January 2009 equaled UAH 806.8 billion. Within the banks' liabilities, theshare of funds attracted to the accounts of individuals as at 1 January, 2009, made up 26.4%(as at 1 January, 2008 – 30.9%), the economic entities – 17.8% (as at 1 January, 2008 –21.1%). The share of credits received from other banks amounted to 30.9% (as at 1 January,2008 – 29.1%), funds of the National Bank of Ukraine – 7.5% (as at 1 January 2008 – 0.3%),own debt securities – 1.3% (as at 1 January, 2008 – 3.7%), the loans received from interna-tional and other financial organizations – 6.4% (as at 1 January, 2008 – 3.7%), funds of non-banking financial institutions – 2.2% (as at 1 January, 2008 – 2.7%), balances of funds on otherbanks' correspondent accounts -1.4% (as at 1 January, 2008 – 2.4%), subordinated debt –2.0% (as at 1 January, 2008 – 1.5%), other liabilities – 4.1% (as at 1 January, 2008 – 4.6%).

58

Annual Repor t 2008

During 2008, the equity of banks of Ukraine grew by 71.4% (for 2007 – by 63.5%) and bythe year end amounted to UAH 119.3 billion. As at 1 January, 2009, the share of capital in lia-bilities of banks made up 12.9% (as at 1 January, 2008 – 11.6%).

A considerable growth rate of the capital of banks of Ukraine in 2008 raised their capital-ization level. For the year, the ratio of the banks' equity to the GDP increased by 2.7 percent-age points to 12.5% due to, in particular, the enlargement of the authorized capital of the state-owned banks to the amount of UAH 13.8 billion.

Within the equity structure of the banks of Ukraine, as at 1 January, 2009, a portion of thepaid-in registered statutory capital amounted to 69.1% (as at 1 January, 2008 – 61.6%), therevaluation result of fixed assets, intangible assets and investments in associated and sub-sidiary companies – 9.4% (as at 1 January, 2008 – 11.8%), general reserves, funds and otherfunds of a bank – 8.6% (as at 1 January, 2008 – 9.7%), the current year result – 6.1% (as at 1 January, 2008 – 9.5%), issue differences – 5.1% (as at 1 January, 2008 – 4.6%), the previ-ous years' result – 1.3% (as at 1 January, 2008 – 2.4%), dividends directed to the enlargementof the statutory capital – 0.4% (as at 1 January, 2008 – 0.4%).

For 2008, the foreign capital in the registered statutory capital of banks of Ukraine aug-mented 2 times and as at 1 January, 2009, accounted for UAH 30.3 billion (as at 1 January,2008 – UAH 15.1 billion). The portion of the foreign capital in the registered statutory capital ofbanks of Ukraine respectively increased to 36.7% as at 1 January, 2009, or by 1.7 percentagepoint.

The regulatory capital of the banks of Ukraine rose for 2008 by 50.8% to UAH 123.1 billion(EUR 11.3 billion) and the capital adequacy of the banking sector as at 1 January, 2009 – to14.01% from 13.92% as at 1 January, 2008.

The number of banks with the regulatory capital of over EUR 20 million, for 2008, enlargedfrom 72 to 89 banks, and their share within the total quantity of acting banks as at 1 January2009, grew from 41.1% to 48.4%.

In line with the decision of the Commission of the National Bank of Ukraine on theSupervision and Regulation of Activities of Banks of Ukraine of 21 December, 2007, the limitsof regulatory capital and assets for the groups of banks for 2008 were defined as follows:group I (regulatory capital of over UAH 1000 million, assets of over UAH 10000 million), groupII (regulatory capital of over UAH 300 million, assets of over UAH 3000 million), group III (reg-ulatory capital of over UAH 100 million, assets of over UAH 1000 million), group IV (regulatorycapital of less than UAH 100 million, assets of lower UAH 1000 million) (see Table 15).

Table 15. CONCENTRATION OF ASSETS, CAPITAL AND LIABILITIES BY GROUPS OF BANKS(in percent)

Group Assets Equity Liabilities01.01.2008 01.01.2009 01.01.2008 01.01.2009 01.01.2008 01.01.2009

Group ² 64.8 68.0 57.2 62.9 65.8 68.7Group ²² 17.2 16.6 16.8 16.3 17.2 16.7Group ²²² 10.2 7.3 12.9 9.3 9.9 7.1Group ²V 7.8 8.1 13.1 11.5 7.1 7.5

In 2008, the process of concentration of assets, capital and liabilities in the banks of group² continued, where, as at 1 January, 2009, 68.0% of the assets of banks of Ukraine, 62.9% ofthe capital and 68.7% of the total liabilities (including in the market of the individuals' deposits– 67.3%) were concentrated.

The income of the banks of Ukraine as at 1 January, 2009, amounted to UAH 122.6 billion,or grew for the year by 79.8% (see Figure 46).

During 2008, within the structure of the banks' income, diminishing was the share of inter-est income (to 72.1% from 74.6% as at 1 January, 2008), commission income (to 16.2% from

59


18.3% as at 1 January, 2008) and other operational incomes (to 1.9% from 2.3% as at 1January, 2008) with increase in the share of the trade operations result (to 9.4% from 4.3% asat 1 January, 2008).

In 2008, compared with the previous year, the expenditures of banks of Ukraine increasedby 87.2% and as at 1 January, 2009, equaled UAH 115.3 billion.

Figure 46. Dynamics of income, expenses and profit of Ukrainian banking sector

For 2008, within the general expenditures of banks, the share of interest expenses reducedfrom 46.5% to 44.1% as at 1 January, 2009, the general administrative expenses – from 30.6%to 24.9% and commission expenses – from 2.3% to 1.9%, with increase in the share of alloca-tions to reserves from 11.8% to 21.0% as at 1 January, 2009.

The expense to income ratio of banks equaled 94.0% (for 2007 – 90.3%). The return onassets of banks for 2008 accounted for 1.03% (for 2007 – 1.50%), the return on capital – 8.51%(for 2007 – 12.67%).

Table 16. CONCENTRATION OF INCOME, EXPENDITURES AND PROFIT BY GROUPS OF BANKS(in percents)

Group Income Expenses Profit01.01.2008 01.01.2009 01.01.2008 01.01.2009 01.01.2008 01.01.2009

Group ² 64.8 66.1 63.9 66.1 73.0 66.8Group ²² 15.1 16.4 15.4 16.1 12.7 21.3Group ²²² 11.6 7.9 11.9 8.1 8.1 4.9Group ²V 8.5 9.6 8.8 9.7 6.2 7.0

By the results of 2008, the acting banks of Ukraine got the profit that, compared with theprevious year, grew by 10.3% and equaled UAH 7.3 billion (for 2007 – UAH 6.6 billion), with66.8% of the amount secured by the profit of banks of group ² (see Table 16).

2.3.2. Survey of the sector of other depository corporations (banks)10

Complication of access to external sources of financing, especially in the second half of theyear, and slowdown in the money receipts to the banks from residents resulted in deceleration ofthe growth rate of transferable (to 116.0% against 147.8% in 2007) and other deposits included inthe monetary aggregate M3 (to 133.3% against 153.8% in the previous year – see Table 17).

60

Annual Repor t 2008

10 This is an analytic form of presenting the statistical data of other deposit corporations (banks) compiled on the basis of data of the standardized reporting form by the IMF methodology. In accor-dance with international standards the money and credit indicators are given within financial instru-ments and sectors of the economy.

Table 17. DATA RELATED TO THE SURVEY OF THE OTHER DEPOSITORYCORPORATIONS (BANKS) SECTOR, AS AT 1 JANUARY 2009

Change For reference:for 2008 Change for 2007

Indicators By the period UAH By the period UAHend, billion % end, billion %

UAH, billion UAH, billion

Net external assets –226.1 –112.2 – –113.9 –69.7 –Claims on the National Bank of Ukraine 34.3 0.7 2.2 33.6 11.0 48.5Net claims on central government bodies 13.0 10.3 – 2.7 0.6 –Claims on other residents 753.9 310.7 70.1 443.2 188.2 73.8Liabilities to the National Bank of Ukraine 61.0 59.2 3.5 1.7 0.3 20.6

timesmore

Transferable deposits included in monetary aggregate Ì3 104.8 14.4 16.0 90.4 29.2 47.8Other deposits included in monetary aggregate Ì3 252.4 63.0 33.3 189.4 66.3 53.8Shares and other equity 135.8 58.4 75.4 77.4 30.1 63.6

During 2008, noted were downward dynamics of net external assets of the other deposito-ry corporations (banks) sector, that, as at 1 January 2009, equaled "minus" UAH 226.1 billionagainst "minus" UAH 113.9 billion at 1 January 2008 due to excess of the liabilities to non-res-idents over the claims on non-residents. The main reduction in net external assets of the sec-tor of other depository corporations (banks) in the 4th quarter of the reporting year (from "minus"UAH 163.7 billion as at 1 January, 2008, to "minus" UAH 226.1 billion as at 1 January, 2009)was primarily due to devaluation of hryvnia against the main currencies.

The growth rate of claims on other residents decelerated to 170.1% compared with 173.8%in 2007. However, during the year, the situation development was uneven: during January-September, their notable slowdown took place – to 153.4% in the annual calculation as at 1October 2008. Starting from October, the claims on other residents began to rise at a quickenedpace, mainly, due to growth of claims in foreign currency in view of devaluation of hryvniaagainst the main foreign currencies. The largest influence on the dynamics of claims on otherresidents was caused by the dynamics of claims on other non-financial corporations (that cov-ered more than a half within the structure of claims on other residents). From the year start,there was an essential slowdown in their growth rate to 151.4% in the annual calculation as at1 October, 2008, compared with 162.4% for 2007 due to deceleration of the growth rate of thebanks' resource base for reasons of complication of the terms of access to external sources offinancing and necessity to fulfill the requirements of the National Bank of Ukraine aimed atrestraining the credit activity of those banks that had no necessary resources of the properduration. Then their acceleration to 162.2% in the annual calculation took place as at 1 January,2009, primarily at the expense of augmentation of the claims in foreign currency.

Claims of other depository corporations (banks)As at 1 January, 2009, claims of other depository corporations (banks) on the National Bank

of Ukraine amounted to UAH 34.3 billion and augmented for the year by 2.2%, primarily due togrowth of the cash balances in the national currency by 12.6%. At the same time, the balanceson deposits and funds invested in securities other than shares reduced by 1.9% and 11.1%respectively.

By December-end of 2008, net claims of other depository corporations (banks) on centralgovernment bodies equaled UAH 13.0 billion and enlarged during the reporting year 4.7 times

61


on account of augmenting the claims on the central government bodies 2.9 times. Liabilities ofother depository corporations (banks) to central government bodies grew for the year by 45.5%,mainly due to the growth (by 53.7%) of other accounts payable.

Liabilities of other depository corporations (banks)Liabilities of other depository corporations (banks) to the National Bank of Ukraine as at 1

January, 2009, amounted to UAH 61.4 billion and augmented for the year 35.1 times, entirelydue to enlargement of the loans received.

Funds allocated to shares and other equity, by the end of December 2008, totaled UAH135.8 billion and rose for the year by 75.4% compared with 63.6% increase in 2007.

By the results of 2008, transferable deposits and other deposits of other depository corpo-rations (banks), that are included in monetary aggregate Ì3, increased by 16.0% and 33.3%,respectively. Within the transferable deposits, the largest was the growth of deposits of the pub-lic non-financial corporations sector (by 69.5%), among other deposits – balances of funds ofother sectors of the economy (by 39.5%).

2.3.3. Deposit MarketDeposits attracted from residents as at 1 January, 2009, amounted to UAH 359.7 billion.

For the year, the growth rate of deposits was 126.7% against 152.7% by the end of December2007 (see Table 18).

Table 18. MAIN INDICATORS OF DEVELOPMENT OF THE DEPOSIT MARKET OF UKRAINE

Variations of dynamics of the deposit growth were in line with dynamics of the economicgrowth. A gradual slowdown in the growth rate was notable from April 2008. In May, reductionin deposits was mainly due to revaluation of hryvnia against the main foreign currencies.Moreover, more active usage of own working capital to finance the business (in the conditionsof deceleration of the crediting rate, strengthening of financial discipline and continuation by theGovernment of Ukraine of the funds accumulation policy) resulted in decrease of the balancesof funds in national currency on the accounts of the institutional units of the non-financial cor-porations sector. In July-September, due to slowdown in the economy growth, decreasing werethe incomings of proceeds to the demand accounts of corporations of the non-financial corpo-rations sector; current expenses grew (seasonal factor and rise in prices) and the households'

62

Annual Repor t 2008

2008 For reference: 2007Growth % to Growth % to

Indicators UAH, Share, UAH, previous UAH, Share, UAH, previousbillion % billion year billion % billion year

Liabilities, totalincluding: 359.7 100.0 75.8 126.7 283.9 100.0 98.0 152.7

By types of currenciesin national currency 201.8 56.1 9.5 105.0 192.3 67.7 77.2 167.1in foreign currency 157.9 43.9 66.3 172.4 91.6 32.3 20.8 129.3

By terms of repaymentdemand 107.6 29.9 14.2 115.2 93.4 32.9 30.8 149.3short-term 92.9 25.8 32.3 153.3 60.6 21.4 17.9 141.8long-term 159.2 44.3 29.3 122.6 129.9 45.7 49.3 161.1

By sectors of the economynon-financial corporations 118.2 32.9 22.6 123.6 95.6 33.7 30.0 145.7households 217.9 60.6 50.6 130.3 167.2 58.9 58.4 153.6other11 23.6 6.5 2.6 112.5 21.1 7.4 9.6 184.0

11 Included are other financial corporations, general government bodies and non-profit organizationsserving the households/

disposition towards savings lowered. At the end of September, on account of artificially pro-voked non-confidence of the population in the financial situation of some banks and the bank-ing system as a whole, that occurred at the background of worsening of external conjunctureand economic situation in the country, the outflow of funds from the deposit accounts of cus-tomers, in particular, of the households sector started. At November-end, certain signs of sta-bilization began to come out in the money and credit market. However, a significant portion ofgrowth was due to devaluation of hryvnia against the main foreign currencies.

During 2008, the deposits structure by types of currency changed: the share of deposits inthe national currency decreased by 11.6 percentage points to 56.1%. Deceleration of the growthrate of deposits in the national currency was notable from April up to the end of the reportingyear. In the 1st half of 2008, the growth rate of deposits in foreign currency fluctuated at thelevel of the year start. In August-September their slowdown took place reasoned by reductionin the incoming of export receipts on the accounts of institutional units of the non-financial cor-porations sector. In October-December, the growth rate of deposits in foreign currency consid-erably exceeded the rate of their growth in 2007, that was reasoned by devaluation of hryvniaagainst the main foreign currencies, while in the 4th quarter deposits in these currencies evendecreased (see Figure 47).

Figure 47. Growth rate of deposits attracted from residents by other depositorycorporations (in percent to the year start)

By the attraction terms, in 2008, deceleration of the growth rate of long-term depositsoccurred (to 122.6% versus 161.1% in 2007) and of the demand deposits (to 115.2% versus149.3%, respectively). At the same time, the growth rate of short-term deposits accelerated andamounted to 153.3% versus 141.8% in 2007. In the conditions of unfavourable economic envi-ronment, fluctuations of the exchange rate and uncertainty with regard to the direction of theeconomic situation development, the depositors preferred short-term deposits to long-term ones,and also the outflow of funds from the demand accounts (as the most accessible) increased.

The deposits structure by sectors of the economy for 2008 changed in a minor way. Asbefore, the largest amount of deposits was formed at the expense of funds of the householdssector, as at 1 January 2009 – 60.6% of the total deposits (versus 58.9% as at 1 January 2008).Funds of institutional units of the nonfinancial corporations sector within the deposits structureequaled 32.9%, of the other financial corporations subsector – 5.4%, of the general governmentsector – 0.7% (see Figure 48).

As at 1 January 2009, deposits of the households sector amounted to UAH 217.9 billion. Duringthe year, their growth dynamics depended on the dynamics of incomes and expenditures of thepopulation being influenced by a social direction of the budget policy, rise in retail prices of goodsand services, etc.. Within deposits of the households sector, the deposits in the national currencyprevailed – 50.5% (that is by 10.7 percentage points less than at the year start). By attraction terms,a larger portion of deposits was made by those whose term was from 1 to 2 years – 45.3%.

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Figure 48. Deposits dynamics by sectors of the economy

The growth rate of deposits of the households sector during the reporting year slowed down to130.3% compared to 156.7% (in the annual calculation) in April, when they were the largest, and153.6% in December 2007. Mass withdrawal of deposits by households and increase in the demandfor foreign currency in cash was evident at the beginning of October. At the end of November,observed was the deceleration of the outflow rate of deposits from the banking system. This wascontributed to some extent by enlargement of the remuneration on the individuals' deposits, guar-anteed by the Individuals' Deposits Guarantee Fund from UAH 50 thousand to UAH 150 thousand.

As at 1 January 2009, deposits of the nonfinacial corporations sector amounted to UAH118.2 billion, among them belonging to the public nonfinancial corporations subsector – UAH12.3 billion, or 10.4%. Within the funds of the nonfinancial corporations sector the deposits inthe national currency traditionally prevailed – 63.7% (by 11.7 percentage points less than at theyear start). The demand deposits had the largest portion by terms (51.8%).

In the annual calculation, the growth rate of deposits of the nonfinancial corporations sec-tor was lower than the growth rate of deposits of the households sector and in December 2008decreased to 123.6% versus 150.0% in March, when they were the highest (in December 2007– 145.7%). The tendency towards excess of the growth rate of funds on accounts in the nation-al currency compared to foreign one, that continued from May 2007, starting from October ofthe reporting year, changed for opposite (due to reduction in the exchange rate of hryvniaagainst the US dollar and euro). The working capital deficit made the corporations to diminishthe time deposits using these funds to finance the needs of current activities.

While in the 1st quarter 2008 the main increase in funds on the accounts of the other finan-cial corporations subsector was formed at the expense of funds of the subsector of other finan-cial intermediaries and auxiliary financial organizations, then in April-December the growth offunds was observed on the accounts of the subsector of insurance corporations and non-gov-ernment pension funds. Among the main factors of such dynamics there were a decrease in thestock market attractiveness and decline in the investors' interest to investment funds. Moreover,in expectation of decline in the exchange rate of hryvnia, free funds were directed to the foreigncurrency purchase instead of other forms of investing the funds. At the same time, significantvolumes of crediting enabled the insurance corporations to enhance insurance services on theagreements of insuring the borrowers' collaterals and lives. Accumulative insurance was alsoamong the alternatives of the free funds allocation.

Within the regions, as at 1 January, 2009, the largest volumes of deposits (61.7%) wereattracted by banks of the city of Kyiv and Kyiv region (43.5%), the Dnipropetrovsk region (9.8%)and the Donetsk region (8.4%).

The cost of deposits attracted from residents, after decrease in the 1st half of the year to7.0% per annum (versus 8.0% per annum in January 2008), rose in the 2nd half of the year andin December amounted to 11.3% per annum (see Figure 49). The average weighted interestrate for 2008 equaled 8.3% per annum compared to 7.2% per annum in 2007, including in the

64

Annual Repor t 2008

national currency – 9.9% against 8.2% per annum, respectively. The main growth of interestrates on deposits both in national and foreign currencies was noted in September-December ofthe reporting year and determined by prevention of the funds outflow from the banking system,by buildup of the resource base and support of the banking sector liquidity.

Figure 49. Dynamics of average weighted interest rates on deposits

2.3.4. Credit market The credits extended by banks to residents as at 1 January, 2009, totaled UAH 734.0 bil-

lion. During 2008, the growth rate of debt under the credits granted amounted to 172.0% andwas a little bit lower than for 2007 (174.1%) (see Table 19).

Table 19. MAIN INDICATORS OF DEVELOPMENT OF THE CREDIT MARKET OF UKRAINE

During 2008, the dynamics of volumes of crediting the residents were uneven. After accel-eration of the growth rate of crediting to 178.0% in January in the annual calculation, inFebruary-September 2008 the tendency towards a gradual deceleration of the growth rate ofcredits (154.1% in September in the annual calculation) was noted. Such a situation wascaused by reduction in the growth rate of banks' resource base through:

– complication of the conditions of access to external sources of financing,– worsening of the financial situation of enterprises,– decrease in the households' solvency,– necessity for fulfillment of the requirements of the National Bank of Ukraine aimed at

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2008 For reference: 2007Balances, Growth % to Balances Growth % to

Indicators UAH, Share, UAH, previous UAH, Share, UAH, previousbillion % billion year billion % billion year

Credits, total 734.0 100.0 307.2 172.0 426.9 100.0 181.6 174.1including:

By type of currencyin national currency 300.2 40.9 86.5 140.4 213.8 50.1 90.0 172.7in foreign currency 433.8 59.1 220.7 2.0 times more 213.1 49.9 91.6 175.4

By term of repaymentshort-term 221.9 30.2 90.5 168.8 131.5 30.8 45.3 152.6long-term 512.1 69.8 216.7 173.4 295.4 69.2 136.3 185.7

By sector of the economyto non-financial corporations 443.7 60.4 183.2 170.3 260.5 61.0 100.0 162.3to households 280.5 38.2 120.1 174.9 160.4 37.6 78.4 195.6to others 9.8 1.4 3.9 164.3 6.0 1.4 3.2 2.2 t.m.

restraining the credit activity of the banks having no necessary credit resources with appropri-ate terms.

Starting from October 2008, the tendency changed for opposite. Took place a noticeable accel-eration of the growth rate of credit investments of banks (in the annual calculation to 162.1%,166.4% and 172% in October, November and December, respectively), primarily, due to growth ofcredits in foreign currency on account of revaluation of hryvnia against the main foreign currencies.

During 2008, the credits structure by types of currencies changed. In view of reduction inthe banking sector liquidity, devaluation of the hryvnia, slowdown in the deposits growth ratesince the 2nd quarter, the rate of crediting in the national currency decreased. As a result, redis-tribution of indebtedness under credits took place at the expense of decrease of its portion inthe national currency by 9.2 percentage points to 40.9% (see Figure 50).

Figure 50. Growth rate of credits extended to residents by other depositary corporations (in percent by beginning of the year)

The slowdown in the rate of crediting in foreign currency was evident during February-September, taking place mainly due to deceleration of the growth rate of the long-term credit-ing. The factors for such dynamics were measures of the National Bank of Ukraine directed todiminution of foreign exchange risks, as well as unwinding of the world financial crisis that lim-ited attraction by the banking sector of the funds from abroad for active operations. In October-December 2008, the growth rate of credit investments in foreign currency significantly acceler-ated, and, by the year results, exceeded the growth rate in 2007 (2.0 and 1.7 times, respec-tively) (see Figure 49). This was primarily attributable to devaluation of hryvnia against the US dollar and euro. The indebtedness under credits in these currencies somewhat reduced.

By terms of the credits allocation, in 2008, there was slowdown in the growth rate of indebt-edness on long-term credits to 173.4% versus 185.7% in 2007. In particular, this was the responseto fulfillment of the requirements of the National Bank of Ukraine imposed in February 2008 andaimed at limiting the gap between the terms of deposits attracted and of credits allocated.Moreover, in April of the reporting year, the National Bank of Ukraine took a decision, that, whenconsidering a question about the liquidity support of banks through refinancing, the informationrelated to conduct by them of the credit policy within the credit resources available by terms andvolumes should be taken into account. At the same time, the growth rate of short-term credits,compared to 2007, accelerated and amounted to 168.8 % against 152.6% in the previous year.

The credits structure by sectors of the economy in 2008 remained practically unchanged.As before, the largest volumes of credits were directed to the nonfinancial corporations sector(60.4% of the total credits to residents) and the households sector (38.2%). Small volumes ofcredits were extended to the other financial corporations sector and the general governmentsector; compared to 2007, their share remained unchanged and amounted to 1.4% (seeFigure 51).

66

Annual Repor t 2008

Figure. 51. Dynamics of credits by sectors of the economy

The indebtedness under credits extended to the nonfinancial corporations sector as at1 January, 2009, totaled UAH 443.7 billion, among which the credits to the state nonfinancialcorporations subsector equaled UAH 37.4 billion, or 8.4% of the total volume. Though inFebruary-September 2008 the growth rates of crediting the nonfinancial corporations sectorwere steadily decreasing in the annual calculation, in October-December they significantlyaccelerated and, by results of 2008 (170.3%) exceeded the level of 2007 (162.3%) (see Figure52), mainly due to the growth of credits in foreign currency.

Figure 52. Credits extended to non-financial corporations (yoy)

Among the credits extended to the nonfinancial corporations sector more than a half wasindebtedness on credits in foreign currency that for the year enlarged 2.1 times. The main incre-ment in this indebtedness was observed in the 4th quarter due to the devaluation of theexchange rate of hryvnia against the US dollar and euro. The mentioned debt portion within thestructure of credit investments by types of currencies augmented for 2008 by 9.6 percentagepoints (in particular, for the 4th quarter – by 6.2 percentage points) to 51.6%.

The credits to the nonfinancial corporations sector in the national currency during 2008grew at much lower rate compared with credits in foreign currency and augmented for the yearby 42.1%.

Within the terms the highest demand was for credits to 5 years both in national and foreigncurrency.

The rate of crediting the households sector was higher than that of crediting the nonfinan-cial corporations sector. However, an essential reduction in their growth rate, that started fromJanuary 2007, was precisely on credits of this sector. For 2008, their growth rate slowed downto 174.9% versus 195.6% in 2007 (see Figure 53).

67


68

Annual Repor t 2008

Figure 53. Credits granted to households (yoy)

At that, a stable tendency towards reduction in the rate of crediting the households sectorwas observed to September 2008 (but January), which was due to strengthening of the banks'requirements to assessment of customers' credibility, that, in its turn, suspended the growth rateof consumer credits. From October to the end of the year, monthly absolute increment of claimson credits of the households sector accelerated exclusively at the expense of enlargement ofcredits in foreign currency as a result of devaluation of the exchange rate of hryvnia against themain foreign currencies. As at 1 January, 2009, credits in national currency diminished by 3.9%compared to 1 January, 2008.

Credits extended to the households sector, as at 1 January, 2009, amounted to UAH 280.5billion, being directed primarily to the current needs, whose portion in the total indebtednessequaled 67.3%. Preference was given to credits in foreign currency for the term of over 5 years.

By the end of 2008, within the regions, the largest volumes of credits were extended bybanks of the Kyiv region and the city of Kyiv (45.6%), the Dnipropetrovsk region (10.5%) andthe Donetsk region (7.3%), which directed most of credits (63.4% of the total volume) to thenonfinancial corporations sector and the households sector.

During 2008, in conditions of the lasting reduction in free liquidity of the banking system andin order to cover increasing credit risks due to worsening of the borrowers' credibility, observedwas a general tendency towards gradual growth of the cost of credits extended to residents(without taking into account operations on overdraft) to 19.4% per annum in December 2008compared to 13.4% per annum in December 2007 (see Figure 54).

Figure 54. Dynamics of average-weighted interest rates on credits

For 2008, the average weighted interest rate under credits equaled 15.5% per annum com-pared to 13.0% per annum for 2007, including in the national currency – 17.6% against 13.9%per annum, respectively.

69


2.3.5. Credits and deposits in the interbank marketDuring 2008, development of the interbank credit and deposit market was unsteady. The balances on the credits granted and deposits attracted by banks at the end of

December 2008 totaled UAH 50.2 billion, among them the credits extended to banks equaledUAH 29.7 billion, or 59.2% of the total volume.

During January – August, observed was a gradual slowdown of the growth rate of credits inthe interbank market, and from the end of September – decrease in their volumes. This was pri-marily caused by contraction of free liquidity of the banking system due to outflow of deposits,increase in demand for the credit resources and reduction in their supply. For the year, as awhole, credits in the interbank market curtailed by 36.8% (for 2007 they grew 2.5 times), whichwas conditioned by reduction in indebtedness on the credits extended for a term of up to 1 yearin all types of currencies (see Table 20).

Table 20. CREDITS EXTENDED IN THE INTERBANK MARKET

At the same time, in 2008, starting from June, in the interbank market the balances ofindebtedness on long-term credits were gradually increasing. For June-December of the report-ing year their volume grew by 22.0%. However, the portion of long-term credits in the interbankmarket was insignificant and amounted to 5.9% of the banks' credit portfolio.

Dynamics of attracting the deposits in the interbank market during the reporting year wasformed under the influence of essential demand for credits on a part of borrowers andrestrained increase in the money supply. As a result, the deposits attracted, for the year, aug-mented by 45.8%, or by UAH 6.4 billion (against 54.7%, or UAH 5.0 billion in 2007). During sev-eral months only (in July, August and October), decrease in the deposits attracted in the inter-bank market was noted (see Table 21).

At that, the growth rate of deposits in foreign currency in the interbank market for 2008 wasmuch higher (190.1%), than their growth rate in national currency (118.1%). This resulted fromthe fact that banks needed additional funds in foreign currency to support current and short-term liquidity at a proper level, as well as to serve the agreements on attraction of funds abroad.

Needs of banks in additional credit resources to optimize the liquidity level were the mainfactor that influenced the formation of demand for and supply of credit resources in the inter-bank market. The volumes of operations on the credits extended to banks in 2008 grew by86.6% to UAH 1720 billion, and on the deposits attracted from banks – 4.3 times to UAH47.3 billion.

The dynamics of interest rates on credits in the interbank market were adequate to thechanges in the dynamics of the banks' liquidity. In April-June, due to the banks' low liquiditylevel, the cost of credit resources in the interbank market was the highest and fluctuated from11.2% to 13.5% per annum. In July-September, it somewhat lowered (to 6.9% per annum inSeptember) and in October-December, due to reduction in the resource base, motivated by the

2008 For reference: 2007Growth Change, Growth Change,

Indicators UAH, Share, UAH, % of previous UAH, Share, UAH, % of previousbillion % billion year billion % billion year

1.1. Credits, total 29.7 59.2 –17.3 –36.8 47.0 100.0 28.4 152.6including:1.1. By types of currencies

in national currency 12.6 42.5 –9.4 –42.8 22.0 46.9 13.0 143.4in foreign currency 17.1 57.5 –7.9 –31.5 25.0 53.1 15.4 161.4

1.2. By terms of repaymentto 1 year 27.9 94.1 –17.6 –38.7 45.6 96.9 27.4 151.2over 1 year 1.8 5.9 0.3 22.0 1.4 3.1 1.0 208.8

outflow of deposits from the banking system, grew again up to 20.3% per annum in Novemberand some reduction of its level occurred in December (to 17.6% per annum).

Table 21. DEPOSITS ATTRACTED IN THE INTERBANK MARKET

Similar were the dynamics of the deposits cost in the interbank market. The highest inter-est rates were notable in April-June (from 9.8% to 12.0% per annum) with later reduction in July-September to 6.9% per annum. In October-November 2008, the cost of deposits attracted in theinterbank market rose to 18.5% per annum, and in December diminished to 15.6% per annum(see Figure 55).

Figure 55. Average-weighted interest rates on credits and deposits in the interbank market

As a whole, for 2008, the average weighted interest rate on interbank credits increasedcompared to 2007 from 4.0% to 10.3% per annum, on interbank deposits – from 10.9% to13.7% per annum. Changes in the cost of the interbank credits and deposits were reflectedsomewhat in the cost of credits and deposits of other sectors of the economy.

2.3.6. Operations of banks in the securities marketIn keeping with the laws of Ukraine "On the Banks and Banking Activities" and "On the

Securities and the Stock Market", the banks of Ukraine may carry out operations with securitiesas the issuers of securities, as investors and as intermediaries that perform the operations withsecurities in the interests and by order of their customers (see Table 22).

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Annual Repor t 2008

2008 For reference: 2007Growth Change, Growth Change,

Indicators UAH, Share, UAH, % of previous UAH, Share, UAH, % of previousbillion % billion year billion % billion year

1.1. Deposits, total 20.5 40.8 6.4 45.8 14.0 100.0 5.0 54.7including:1.1. By types of currencies

in national currency 10.2 49.6 1.5 18.1 8.6 61.3 4.2 94.4in foreign currency 10.3 50.4 4.9 90.1 5.4 38.7 0.8 16.9

1.2. By terms demand 10.6 51.7 –1.4 –11.3 11.9 85.0 4.9 68.3to 1 year 9.5 46.5 7.5 371.6 2.0 14.4 0.1 5.6over 1 year 0.4 1.8 0.3 317.0 0.1 0.6 … 22.2

Table 22. LIST OF OPERATIONS WITH SECURITIES, PERFORMED WITH A WRITTEN PERMIT OF THE NATIONAL BANK OF UKRAINE AND NUMBER OF BANKS THAT GOT IT

Number of banks atFor reference:

No. Name of transactio 01.01.2009 01.01.2008

1. Issuing the own securities 175 1692. Organizing the purchase and sale of securities

by order of customers 177 1713. Performing the transactions in the securities market

in one's own name (including the underwriting) 177 1714. Making the investments in the statutory funds

and shares of other legal entities 129 1715. Fiduciary management by funds and securities under the agreements with legal entities and individuals 145 1446. Depository activity of the securities custodian 127 1127. Activity on keeping the registers of owners of inscribed securities 49 49

The banks' investments on securities by the end of 2008 amounted to UAH 34.7 billion, orgrew for the year by 60.1% (for 2007 – by 58.7%). In the securities portfolio of banks the shareof investments in securities (other than shares) equaled 81.1% (by the end of 2007 – 70.1%).

The banks' investments in securities (other than shares) for 2008 augmented by 85.1% (for2007 – by 59.2%) to UAH 28.1 billion as at 1 January, 2009. In the securities portfolio of banksthe debt commitments (other than shares) of residents of the nonfinancial corporations sectoramounted to 28.5% (as at 1 January, 2008 – 48.9%), the general government sector – 61.9%(as at 1 January, 2008 – 41.1%), the other financial corporations sector – 9.6% (as at 1 January,2008 – 10.0%) (see. Table 23).

Table 23. SECURITIES IN THE BANKS' PORTFOLIO2008 For reference: 2007

Balance by the Balance by theIndicators period end, Change for period end, Change for

UAH, billion the year, % UAH, billion the year, %

1. Securities (other than shares) 28.1 85.1 15.2 59.21.1. By sectors:

other financial corporations sector 2.7 84.7 1.5 187.8general government sector 17.4 266.2 6.3 37.2nonfinancial. corporations sector 8.0 0.4 7.4 66.6

1.2. By type of portfolio:portfolio available for sale 22.6 143.4 9.3 70.5trading portfolio 2.7 10.4 2.4 48.8portfolio held to maturity 2.9 –18.0 3.5 41.1

2. Shares in banks' portfolio 6.6 1.5 6.5 57.7including:

sector of other depository corporations (banks) 0.4 54.6 0.3 16.2sector of other financial corporations 2.9 19.4 2.4 138.2sector of nonfinancial corporations 2.6 –19.0 3.2 19.6nonresidents 0.6 14.7 0.5 249.2

For 2008, the funds balances on securities held in the banks' portfolio available for salegrew 2.4 times (for 2007 – by 70.5%) and in the total funds attracted on securities (other thanshares) accounted for 80.3%, in the trading portfolio – by 10.4% (for 2007 – by 48.8%), and inthe portfolio held to maturity reduced, compared with the year start, by 18.0% (for 2007 aug-mented by 41.1%). Within the banks' investments on securities (other than shares) 66.7% weresecurities with over 2 year maturity.

Investments in shares of residents and non-residents for 2008 enlarged by 1.5% (for 200771


– by 57.7%) to UAH 6.6 billion, and their portion in the securities' portfolio of banks amountedto 18.9% (by the end of 2007 – 29.9%).

Banks of Ukraine remained the major owners of T-bills that were in circulation in terms ofthe principal debt amount, their portion in the assets of the consolidated balance sheet of banksof Ukraine as at 1 January, 2009, equaled 1.7% (as at 1 January, 2008 – 0.93%). In the secu-rities portfolio of banks as at 1 January, 2008, there was the largest volume of T-bills (UAH 17.0billion, or 58.2%), that were in circulation in terms of the principal debt sum, whereas non-resi-dents owned T-bills to the amount of UAH 0.5 billion (or 1.6%). During 2008, the T-bills volumein the portfolio of other depository corporations increased by UAH 11.4 billion (see Figure 56).

Figure 56. T-Bills in circulation on the principal debt amount during 2007–2008

The presence of banks as issuers in the stock market of Ukraine was reasoned by thenecessity to diversify the sources of funds in the domestic financial market. Thus, during 2008,the banks of Ukraine continued to issue the corporate bonds. Within their liabilities the share ofown debt securities as at 1 January, 2009, accounted for 1.3% (as at 1 January, 2008 – 3.7%).The banks' indebtedness under own debt securities to residents, taken into account as a partof the money supply, equaled UAH 3.2 billion versus UAH 4.9 billion in 2007, or 1.7% of the totalmonetary aggregate Ì3 against 3.5% in 2007.

Table 24. DYNAMICS OF ISSUING THE BONDS OF BANKS OF UKRAINE IN 2004–2008Year 2004 2005 2006 2007 2008*

Total bond issue by enterprises (UAH, million) 4106.59 12748.28 22070.80 45441.03 28452.89Total bond issue by banks of Ukraine (UAH, million) 217.93 2564.73 4994.0 19647.0 7500.75The share of the banks' bondsin the total bond issue by enterprises (%) 5.31 20.12 22.63 43.23 26.36

* Source: Data of the State Commission on Securities and Stock Market.

For 2008, the State Commission on Securities and Stock Market registered the banks'bonds to the amount of UAH 7.5 billion that was 26.36% of the total issue of bonds by issuers(see Table 24). The reduction in the issue volume of these debt commitments by banks was rea-soned by the general decline in the stock market in 2008.

72

Annual Repor t 2008

2.4. REGULATION OF ACTIVITIES OF BANKS OF UKRAINE ANDSUPERVISION OF THEIR ACTIVITIES2.4.1. Regulation of activity of banks of Ukraine

In 2008, the banking sector was characterized by vulnerability and slowdown of the growth rate.The world financial crisis, the individuals' funds' outflow from the banking system, the

increase in demand for foreign currency, high inflationary pressure and the decrease in the indi-viduals' confidence in some banks had an adverse impact on the development of the bankingsector of Ukraine. One of the main factors of decelerating the banking sector development wasworsening of the assets quality.

Positive trends were the long-term liabilities portion growth, the banks' reserves augmenta-tion, the adequate capitalization level, the disclosure of information about the banks' actualowners, improvement of the risk management practice, reduction in external borrowings bybanks, the banks' higher potential with regard to stress-testing, upgrading of the risk manage-ment system, implementation of more strict prudential requirements to the banks whose liquid-ity position was worsening.

During 2008, the work on improvement of the legislative support of the banks' activities wascarried out. A number of draft laws were handled and proposals and comments were given onthe issues of:

revealing the real owners and setting special requirements to them;defining the rules of protection of the banks' funds and property, order of keeping, trans-

portation and collection of cash, organizing the banks' premises protection;simplifying the mechanism of state registration of the economic entities' activity termination;corporate management and information disclosure; strengthening the role of the Fund for Guaranteeing the Individuals' Deposits in the devel-

opment of the banking system, expanding its regulatory functions, step-by-step enlargement ofthe guaranteed compensation amounts, ensuring equal compensation conditions for depositorsof banks – participants of the Fund, enhancing the list of sources for the Fund's moneyresources formation;

improving the legislative support of realization of the uniform state foreign exchange policy,as well as stability of the currency of Ukraine and the foreign exchange market of Ukraine;

preventing the consequences of the world crisis in the financial sector of the economy, sta-bilizing the banking market and implementing the measures for the trade balance support;

adjusting the use of enforcement measures in case of the banking activity with a high risklevel;

improving the procedures related to the temporary administration and liquidation of banks etc.The work has been done on improvement of the normative and legal base of the National

Bank of Ukraine that regulates activities of banks and banking supervision.In order to strengthen the requirements to the banks' capitalization level, the National Bank

of Ukraine made alterations to some normative and legal acts of the National Bank of Ukraine,in particular:

to the Instruction on the Order of Regulation of the Banks' Activities in Ukraine – with regardto defining the minimum regulatory capital to the amount of EUR 10 million – for the banks thatare established, and a step-by-step enlargement to this amount of the regulatory capital of theacting banks whose regulatory capital is less than EUR 10 million;

to the Regulations on the Order of Issuing to Banks of Banking Licenses, Written Permits andLicenses to Perform Some Operations with regard to strengthening the requirements related tothe statutory capital size of not less than the equivalent of EUR 10 million for getting the bankinglicense by a bank. A similar ratio related to the size of regulatory capital is foreseen when issuingto banks of a written permit of the National Bank of Ukraine to carry out certain operations. Higherrequirement to the regulatory capital has been set when providing the permit to make foreign

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exchange operations, operations in the international markets and to make investments.In order to stimulate the banks to enlargement of the regulatory capital to make active oper-

ations, a new economic ratio (coefficient) of the regulatory capital to the total assets (R3) wasintroduced. This ratio has defined a part of active operations to be carried out at the expenseof capital.

By separate Decision of the Board of the National Bank of Ukraine a bank's minimum reg-ulatory capital in national currency was determined for 2008.

In February 2008, effective became the changes to the Instruction on the Order ofRegulating the Activity of Banks of Ukraine that had been worked out to facilitate the mortgagelending to individuals. These changes in particular:

have decreased the value of the weighing factors when calculating the ratio of regulatorycapital adequacy/solvency (R2) for the State Mortgage Institution's bonds, the liabilities whichare guaranteed by the Cabinet of Ministers of Ukraine, as well as the mortgage loans extend-ed to individuals and fully secured by the real estate for living, owned by the borrower;

have foreseen the cover by capital of foreign exchange risk, as well as determined addition-al weighing on 50% risk coefficient on long-term active operations executed with excess of thefunds placement terms over the funds allocation terms to ensure lessening the risks in the finan-cial system of Ukraine when calculating the ratio of regulatory capital adequacy/solvency (R2).

In order to prevent the performance by banks of transactions with securities of improperquality, as well as highly risky operations that might endanger the security of funds trusted tosuch banks, or harm the proper banking activity, by Decision No.211 of the Board of the NationalBank of Ukraine, dated 23.07.2008, approved were the changes to some normative and legalacts which strengthened the requirements related to determining by banks of the fair value ofsecurities and ensuring the risk coverage by a bank's capital on transactions with the securitiesaccounted in the trading portfolio.

The changes provide for a bank's right to define the fair value of securities in the bank'savailable-for-sale portfolio by the official quotations data of only the listed securities. Banksshould determine the risks of unlisted securities through assessment of an issuer's risk andanticipated money flows.

Moreover, set was the requirement to cover at the expense of a bank's regulatory capitalthe risks on the transactions with:

– unlisted securities in the bank's trading portfolio (but securities issued by central govern-ment bodies, the National Bank of Ukraine and the State Mortgage Institution);

– securities, that are not circulated on the stock exchanges (by promissory notes), in thebank's trading portfolio;

– securities of undiversified investment funds (in the trading portfolio and the portfolio for sale).To improve the financial rehabilitation and procedures of banks' liquidation, changes were

made in the Regulations on the Enforcement Measures by the National Bank of Ukraine for thebanking legislation infringement, in particular with regard to determining (Decision of the Boardof the National Bank of Ukraine No.405, dated 01.12.2008):

– a detailed order of attracting the investors to a bank's financial rehabilitation;– requirements of the National Bank of Ukraine to the liquidator and persons involved in the

bank's liquidation, the order of signing the agreement and payment for his/her work, as well asapproval of the expense budget.

In 2008, approved were the Regulations about the Peculiarities of a Bank's Reorganizationby its Owners' Decision.

In order to ensure stability of the banks' work in case of occurring of the unforeseen cir-cumstances, approved were the Methodological Recommendations for Planning theEmergency Measures in the Banks of Ukraine.

To analyze the banks' activities and tendencies in their developments, to timely reveal theproblems and risks, to determine stability of the banking system with regard to potential shocks

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in the event of crisis situations, the National Bank of Ukraine took a number of measures:– worked out was the Complex system of indicative ratios of the banks' activity, their limit

values and risk factors that enables to analyze the banks' activity by separate directions, as wellas Rules of work according to this Complex system;

– implemented was the stress-testing of influence on the banks' activity of the interest ratechange and fluctuations of the exchange rates of currencies in order to make quantitativeassessment of risks incurred by banks, and to determine a maximum change value of externalfactors (exchange rates, interest rates);

– approved were the Methodological recommendations related to the order of analyzing thefinancial situation of a bank and making the report about the bank – legal entity's monitoring.

In 2008, the new version of the Regulations on the Appeal Commission of the National Bankof Ukraine was approved.

In an effort to optimize the authorities of the Commission of the National Bank of Ukraineon the Issues of Supervising and Regulating the Banks' Activities with regard to simplificationof the order of considering some issues, changes were made in the normative and legal acts ofthe National Bank of Ukraine related to registration, regulation of the banks' activity and use ofthe enforcement measures.

Focusing the citizens on the considered approach to getting a credit, in October 2008, theNational Bank of Ukraine prepared and placed in the Internet, on the Official Web-Site of theNational Bank of Ukraine the Instruction Sheet of a Bank's Borrower of a Consumer Credit, thatpaid attention of borrowers to the risks concerning a credit in foreign currency.

To constrain providing new loans in foreign currency to borrowers having no sources of for-eign currency earnings, to improve quality and liquidity of the collateral taken by banks as secu-rity under credits, as well as to form by banks sufficient provisions under credit operations, thechanges were made in the Regulations about the Order of Forming and Using the Provisionsfor Possible Losses on Credit Operations of Banks, by which:

significantly enlarged were the provisioning coefficients (by a risk degree) on credit opera-tions in foreign currency with borrowers having no sources of foreign currency earnings;

strengthened were the requirements regarding the assessment of the financial situation ofborrowers – individuals and legal entities, in the credit agreements with whom there was no writ-ten consent to collect, keep, use and disseminate through the credit history bureau the infor-mation about them;

increased were requirements with regard to quality of the eligible security.By the same decision the banks were obliged to reserve the funds on a separate account

with the National Bank of Ukraine in the size of the reserve formed on credit operations withborrowers having no sources of foreign currency earnings.

In connection with the significant outflow of funds from the banking system reasoned by thefinancial crisis that had a detrimental effect on the situation in the banking system, primarily, onthe banks' capitalization, as well as in order to fulfill the requirements of the Law of Ukraine "AboutHigh Priority Measures for Prevention of the Financial Crisis Consequences and about Making theChanges in Some Legislative Acts of Ukraine", by the decision of the National Bank of Ukraineapproved was the Special Order of Taking the Measures Related to Financial Rehabilitation of theBanks, that determined the peculiarities of financial rehabilitation of banks and their capitalizationin the conditions of preventing the adverse consequences of the financial crisis, namely:

simplified were the procedures and shortened were the terms for adjusting the banks'statutes and the banks' registration procedures;

defined were simplified orders of increasing the authorized capital at the expense of thebanks' shareholders (participants) and investors, as well as the banks' reorganization by theowners' decision;

determined were the procedures of banks' capitalization with the participation of the stateand the measures of the banks' financial rehabilitation in the conditions of applying the tempo-rary administration.

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During the recapitalization process of the banking system the National Bank of Ukraine ini-tiated a wide scale work related to determining the current and prospective solvency of banksof Ukraine and their resiliency in the crisis conditions, namely, the order of conducting the diag-nostic study of banks and the methodology of assessing the current and prospective solvencyof banks.

Also, worked out were the Regulations about Establishment and Activity of the Committeeof the National Bank of Ukraine on the issues of determining the current and prospective sol-vency of banks of Ukraine and their resiliency in the crisis conditions, that defines the order ofprocessing the reports about results of a bank's diagnostic study by audit firms and preparationon their basis of the proposals, concerning further actions of the regulator with regard to thebank's activity.

In order to arrange for the issue about provision by the National Bank of Ukraine of creditsto support the banks' liquidity in case of a real threat to the banking system soundness causedby instability and fall in the exchange rate of hryvnia against foreign currencies, other circum-stances that contributed to the essential reduction in the solvency of a significant part of banksand their borrowers, the following documents were developed:

– Temporary Regulations about Provision by the National Bank of Ukraine of Credits toSupport the Banks' Liquidity in the Case of a Real Threat to Stability of the Banking System;

– The Temporary Order of Interaction of the Structural Units of the National Bank of Ukraineon the Issues Regarding the Banks' Liquidity Support through the Provision of Loans.

Keeping the confidence and adjustment of the legislative, normative and legal base to therequirements of the European Union has remained the main task on the way to development ofthe banking system of Ukraine.

2.4.2. Supervision of the banks' activities During 2008, the activity of the National Bank of Ukraine was aimed at further development

of the banking supervision system including the improvement of the procedure instruments.The National Bank of Ukraine arranged and ensured supervision over 184 banks, having

licenses for carrying out the banking operations, and also exercised control over the realizationof supervisory functions by the regional branches of the National Bank of Ukraine.

In 2008, the activities of the National Bank of Ukraine were turned to ensuring the soundoperation of banks and supporting the liquidity level required for the timely fulfillment of the com-mitments to the creditors and the depositors.

The banking supervision system was based on the assessment of the banks' activitiesaccording to the ÑÀMELS-system, which consisted in estimating the general situation basedupon the uniform criteria covering the bank operation in all directions of its activities and deter-mining the major risks which the bank came across.

The National Bank of Ukraine started the transition to supervising the banks' activitiesbased on the risk assessment, and it would enable Ukraine to converge as much as practicalto the Basle Core Principles for the effective banking supervision and to initiate the stage-by-stage transition to the implementation of the Basle Committee for Banking Supervision docu-ment on the Capital Measure and Capital Standards (Basle II) and also to effect the reorienta-tion of the retrospective supervision to the perspective (advanced) one.

Risk assessment of a particular bank promoted the determination of the most risky aspectsof its activities in order to develop the individual supervision strategy. In the context of the bank-ing system it would provide with the possibility to determine the highest risk areas and to focusthe attention of the supervisory authority on the banks and areas of the activities which appearto be the most risk affected.

In order to transfer to the risk-based supervision, the National Bank of Ukraine has elabo-rated the basic normative and legal acts which establish the inspection procedures for the banksupervision officers and provide the banks with recommendations on the arrangement and oper-

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Annual Repor t 2008

ation of the risk management systems with the purpose of ensuring their integrity and reliability. During 2008, the National Bank of Ukraine continued the training related to the new

approaches to the banking supervision for the National Bank of Ukraine officers and also con-ducted the educational work with the bank employees regarding the supervision lines and thebest practice on the establishment of the risk management systems with the banks.

The primary factors of the banking sector risks appeared to be the following: consumercredit growth; rise of the foreign exchange credits; rapid increase in commitments to the non-residents; growth of the mortgage credit risks, etc.

In 2008, an extraordinary enforcement measure was applied to one bank, namely, the deci-sion of the Board of the National Bank of Ukraine on the bank liquidation.

Because of the considerable danger to the bank creditworthiness as of 1 January 2009, theNational Bank of Ukraine, seeking to ensure the safe-keeping of assets, to have the compre-hensive assessment of the financial situation and in order to apply the proper measures on bring-ing the banks to compliance with the requirements of the banking legislature, has appointed thetemporary administration for 1 year period in 2 banks: the closed JSC "Prominvestbank" and theJSC "National Credit". With the purpose of establishing favorable conditions for the recovery ofthe financial state, the moratorium on satisfying the creditor claims was declared for the banksfor a six month period since the day when the temporary administration was appointed.

In the closed JSC "Prominvestbank" the temporary administrator together with the investorswere realizing measures on the financial rehabilitation of the bank that were established in theFinancial Recovery Plan for the "Prominvestbank" approved by the temporary administratororder and agreed by a resolution of the Board of the National Bank of Ukraine.

As of 1 January 2009, there were implemented the measures on increasing to the requiredlevel of the authorized and regulative capital of the "Prominvestbank" and on the improvementof its liquidity ratio; it is anticipated that the financial situation and creditworthiness of the bankwill be improved.

In the JSC "National Credit" the temporary administrator made the inventory of valuableskept in the bank cash offices and vaults, inventory of the fixed assets, intangible assets andpayables and receivables; by the results of the inventory check neither violation in accountingnor shortage of valuables have been revealed.

Control over the activities of banks was exercised based upon the statistical reporting ofbanks, inspection reports, auditor opinions and information of banks about the performance ofthe plans of actions on the improvement of the financial situation and the removal of shortcom-ings and violations in the bank activities with the purpose of ensuring compliance of banks withthe requirements of the law in force and the normative and legal acts of the National Bank ofUkraine as well as observing the commitments taken by the banks regarding improvement oftheir activities and reduction of risks available in their operation. In order to analyze and controlthe banks' activities, the Off-site Banking Supervision Department used the software productsand stress-testing estimations.

Based upon the results of the analysis in accordance with the MethodologicalRecommendations on the procedure of analyzing a bank' financial situation and compilation of thereporting on monitoring of a bank-legal entity, which (recommendations) were approved by theinstruction of the National Bank of Ukraine for each bank there was prepared the Report on moni-toring of a bank-legal entity, and it was placed in the bank monitoring module AIS "Dossier of Banks".

The Off-site Banking Supervision Department sent letters to the banks of Groups I and II,requiring to present the estimated performance indicators for 2009 and the development strat-egy for the next 3 years. The performance indicators and the bank development strategies, thathad been provided, were analyzed taking into account the actual bank performance indicators;and in case, the estimated indicators lacked provision of the stable development, the bankswere sent letters with recommendations to adjust and improve the estimated indicators. Duringthe year, quarterly control was exercised regarding adherence to the estimated indicators by thebanks of Groups I and II.

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Moreover, the banks of Groups I and II were sent letters requiring to provide the informa-tion on the substantial amounts of the foreign loans (if any) and their repayment, as well as theinformation on the considerable amounts of the mortgage credits and construction credits.

Permanent control (on the daily basis) was ensured over complying by banks with the eco-nomic ratios and the balance sheet indicators. Banks were forwarded the letters requiring toenhance control and apply measures on adhering by banks to the ratios of capital adequacy,credit risk, liquidity risk and foreign exchange risk.

The banks were sent letters requiring to apply measures on the removal of shortcomings intheir activities, on realization of the plan of actions as regards the improvement of the financialsituation, in particular, increasing the level of capitalization, improvement of the asset quality,growth of the operating efficiency and cost effectiveness, improvement of the quality of theasset and liability management system, and others.

The regular control was performed over the internal audit activities of the banks, over thetime period of reporting on the internal audit work, and such reporting was analyzed as regardsthe compliance with the requirements of the law in force. In case of revealing any breaches ofthe banking laws and the normative and legal acts of the National Bank of Ukraine, the ade-quate enforcement measures were applied to the banks.

Moreover, there were reviewed and analyzed the auditor opinions of the annual financialstatements and consolidated reporting for 2008; determined was their conformity to the require-ments of the normative and legal acts of the National Bank of Ukraine and the international auditstandards and also the agreements on the auditor check of the financial statements for 2009concluded by the banks were analyzed.

The constant control was made over the timeliness and compliance with the requirementsof the law in force and the normative and legal acts of the National Bank of Ukraine as regardsthe disclosure of the financial statements of banks.

In 2008, a special emphasis was made on increasing the capitalization and liquidity levelsof banks, in particular, the improvement of asset and liability equilibrium related to the time peri-ods (maturity). Thus, in order to promote the capitalization of the state-owned banks"Oschadbank" (Savings Bank) and "Ukreximbank", the Cabinet of Ministers of Ukraine was senta letter on the necessity to increase the authorized capital of those state-owned banks follow-ing the results of the diagnostic study performed in accordance with the Procedure of the StateParticipation in Capitalization of Banks approved by a resolution of the Cabinet of Ministers ofUkraine. Taking into consideration the requirements of the Law of Ukraine "On the PriorityMeasures in Order to Prevent the Adverse Effect of the Financial Crisis and on Amendments toSome Legal Acts of Ukraine", the authorized capital of the state-owned banks has beenincreased by UAH 13.8 billion by means of acquiring the shares issued by those banks inexchange for the T-bills of Ukraine. The increased capital of the state-owned banks will essen-tially enhance their opportunity to realize the national investment and innovation programs andprojects, in particular, relating to the energy market crediting, as well as to the common projectsin the consortium of the state-owned banks.

In addition, the National Bank of Ukraine Commission on supervision and regulation of thebanks' activities prepared the decisions as regards permitting the banks to include in their cap-ital those funds that were attracted on condition of the subordinated debt.

In order to meet the requirements of the resolution of the Board of the National Bank ofUkraine "On Particular Issues of the Banks' Activities", the banks of Groups I and II were for-warded letters related to providing the plan of measures on increasing the capitalization (capi-talization programs).

Shareholders and management of 11 banks were recommended to focus attention on thenecessity to bring the organization and legal form to compliance with the requirements of theLaw of Ukraine "On Banks and Banking".

The banks, having a considerable amount of retained profits of the past years, were sentletters with suggestion to forward the profits to the reserve fund.

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Annual Repor t 2008

During 2008, a special emphasis was made on the banks' liquidity situation in order to per-form timely settlements with the creditors and the depositors, in particular, starting from October2008. With this aim in view the Board of the National Bank of Ukraine took decisions to renderthe refinancing loans and the stabilization credits for the banks.

The National Bank of Ukraine Commission on supervision and regulation of the banks'activities prepared the decisions as regards the coordination of the financial recovery programsfor banks, by which the banks have been obliged to report to the National Bank of Ukraine asregards the realization of the financial recovery program.

In addition, during 2008, 17 banks were forwarded letters as regards their discrepancy intiming of the fund attraction and the fund allocation; and management of those banks wasobliged to take measures in order to balance the timing of attraction and allocation of the assetsand liabilities, in particular, for the long-term period, as well as to provide measures and sched-ules to shorten the gaps (mismatching). Realization of the measures by banks and adhering tothe schedules on shortening of the gaps was under the regular control.

Control was also effected over the submission and realization of the plans for a step-by-step(monthly) reduction of the assets and liabilities mismatching available during more than 1 yearin case it exceeded the amount of the registered authorized capital actually paid.

During 2008, the meetings with management of the banks were arranged as regards theparticular issues in the bank activities.

Complaints of the people made in the paper form and through the telephone "line of trust",whose number substantially grew, were further handled. Substantiated answer and adviceregarding the essence of the problem concerned were given to each person.

Decrease in the liquidity level of the banking system of Ukraine tightened the requirementsto the transparency of banks. However, the current level of transparency remained low in com-parison with the level of transparency of the leading international financial organizations. Thebest incentives for increasing the transparency appeared to be two factors, namely: growth ofcredits granted to individuals and attraction of funds on the external markets. In addition, theNational Bank of Ukraine introduced the practice of publications made on the official web-siteof the National Bank of Ukraine concerning the shareholders (both legal and natural entities) ofthe Ukrainian banks on a quarterly basis.

2.4.3. Inspection of banks Inspections of banks of Ukraine were carried out according to the plan approved. During

2008, there were conducted 157 inspections of banks as legal entities, including 64 scheduledinspections and 93 inspections made out of schedule.

13 inspections were performed related to the financial monitoring.The primary goal of the inspections was to establish control over observing by banks the

requirements of laws and the normative and legal acts as regards the following: compliancewith the economic ratios; establishment and use of the provisions (reserves); realization of thebusiness-plan; implementation of the financial recovery plan (in case of the enforcement meas-ures being applied to the bank) and assessment of the bank activities according to the CAMELSsystem within its components and the risk assessment system.

Based upon the inspection results, the proposals were elaborated as to applying theenforcement measures to banks and removal of breaches revealed. Measures have beenapplied in order to restrict risks of the operations in the financial markets, specifically, the capi-tal adequacy regarding the credit risk and the market risk.

The National Bank of Ukraine took the important measures to enhance the self-organiza-tion of the bank operation, namely, strengthening requirements to the internal control system,implementation of the risk assessment on the consolidated basis.

Requirements of the banking supervision to the high-quality operation of banks related tothe adequate assessment of the banking risks and the national policy interests on improvement

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of the real effectiveness in the work of the economic entities coincide.During the inspections, primary attention was focused on ensuring the priority trends from

the point of view of securing the regulation conditions for the implementation of the bankingtechnologies for the development of the real sector of the economy:

– ensuring the provisions adequacy;– strengthening the attention to the assets and liabilities structure by the time priority;– developing the supervision on the consolidated basis. The key factor remains the establishment of provisions for the possible losses under cred-

its. Based both on the prudential supervision and on the inspections, the National Bank of

Ukraine worked thoroughly at ensuring the establishment of the necessary provisions in thebanks.

As of 1 January 2009, the provisions for possible losses under active operations grew toUAH 48.4 billion.

The establishment of provisions appears to be the fulfillment of the National Bank ofUkraine requirements as an element of the inter-bank risk management. Developing the inter-nal mechanisms and instruments for the credit risk assessment, the banks solved the problemson the improvement of the management quality as one of the primary objects of applying thebanking supervision instruments.

Growth of the credit amounts raised the level of risks that demanded the enhanced controlover the banking sector by the National Bank of Ukraine. The establishment of control over thelarge exposure operations carried out by the banks of Ukraine was aimed at prevention of therisk growth for a short-time period and allowed to reduce the factors of vulnerability.

During the inspections, a particular emphasis was given to covering the liabilities by theassets of the correspondent maturity in a sufficiently large time range and the possibility of oper-ative resource management in the banks: sources of funding and possibility for the profitableshort-term allocation of the temporary free funds.

Based upon the data of the risk assessment system, the activities of banks were classifiedas those of low risk, moderate risk and high risk.

Bank inspections were one of the National Bank of Ukraine tasks on effecting control aimedat revealing of the possible components of the prudential infringements of law, and such con-trol consisted of three stages:

– obtaining necessary information;– legal qualification of the infringement;– taking decision on applying the enforcement measures. Bank inspections permitted the National Bank of Ukraine to clarify a number of issues:– accuracy (preciseness) of reports provided by the bank;– actual operations performed by a bank and the general financial situation of a bank;– adequacy of the risk management system and the internal control procedures in the bank;– credit portfolio quality;– adequacy of provisions to cover possible losses;– management competence;– adequacy of accounting and management information systems;– problems revealed during the previous inspection;– compliance of the bank activities with the laws and the normative and legal acts, as well

as with the terms and conditions of the license granted for carrying out the banking operations. Upon revealing the infringements of the law in force and of the normative and legal acts of

the National Bank of Ukraine and the high risks available in the activities of banks, in 2008, the

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Annual Repor t 2008

National Bank of Ukraine forwarded written warnings, including those by the results of the com-plex inspections and thematic surveys; imposed penalties on the banks and administrative fineson the bank managers; written agreements were concluded with the banks as regards theimprovement of their financial situation; temporary administrations of the banks and bank liqui-dation processes were launched.

During 2008, the National Bank of Ukraine also applied to the banks some other enforce-ment measures. Thus, the banks were sent written notices, demands to provide letters of thebank commitments and the list of measures aimed at the improvement of the financial situationand adhering to the prudential norms.

During 2008, the National Bank of Ukraine, within the Program of cooperation of theNational Bank of Ukraine with the law enforcement authorities on promptly revealing of theoperations performed in breach of the laws in the banking area for 2007-2008 and the Protocolsof Information Exchange signed with the law enforcement bodies (Prosecutor's General Officeof Ukraine, Ministry of Internal Affairs of Ukraine, Security Service of Ukraine, State Committeeof Financial Monitoring of Ukraine, State Tax Administration of Ukraine), cooperated with the lawenforcement authorities and conducted joint inspections of the banking institutions.

Observing the law of Ukraine "On the Organizational and Legal Principles of Fight againstthe Organized Criminal Activities" and in accordance with the Program of cooperation of theNational Bank of Ukraine with the law enforcement bodies, the National Bank of Ukraine for-warded 20 notifications with information that could testify to the facts of the organized criminalactivity.

Inspections of the National Bank of Ukraine were aimed at providing the effectiveness andstability of the banks' activities as the ground for trust of the society to the banking system. Theycontributed to prevention of conducting the high risky banking business and to the protection ofdepositors and creditors from the possible losses of funds in the result of applying the enforce-ment measures upon revealing the violation of the bank activities' norms.

2.4.4. Registration and licensing of banksAs of 1 January 2009, 198 banks were registered in the State Register of Banks, including

167 joint stock companies (among them 127 open type joint stock companies and 40 closedtype companies); 31 banks were established as companies with limited responsibilities.

Among the banks registered in the State Register of Banks, 184 banks possessed licens-es for carrying out the banking operations, including 182 banks having the written permits forconducting the banking operations and operations with foreign exchange valuables.

In order to distinguish the supervision functions between the head office and regionalbranches of the National Bank of Ukraine and to review the activities of the banks of Ukraine,there have been formed groups of the banks in accordance with the parameters determined.

For 2008, four groups of banks were determined relative to the amount of the regulatorycapital and assets:

Group I consisted of 18 banks (or 9.8% of the total number) whose regulatory capitalexceeded UAH 1 500 million and assets of more than UAH 14 000 million;

Group II consisted of 20 banks (or 10.9% of the total number) whose regulatory capitalexceeded UAH 500 million and assets of more than UAH 4 000 million;

Group III consisted of 24 banks (or 13% of the total number) whose regulatory capital wasmore than UAH 200 million and assets of more than UAH 1500 million;

Group IV included 122 banks (or 66.3% of the total number) whose regulatory capital wasless than UAH 200 million and assets of less than UAH 1500 million

In Ukraine there were functioning 2 banks having 100% state-owned authorized capital.Those were the open JSC "State Savings Bank of Ukraine" and the open JSC "State Export-Import Bank of Ukraine". By the results of 2008, the state-owned banks belonged to the top tenbanks of Ukraine by the amount of the regulatory capital and assets. The activities of the JSC


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Annual Repor t 2008

"State Export-Import Bank of Ukraine" were purposed to granting credits for the fundamentaland perspective areas of the economy of Ukraine, primarily, the export-oriented and demon-strating the stable indicators of growth.

The JSC "State Savings Bank of Ukraine" was the only Ukrainian bank that possessed thegovernment insurance for deposits of the population in accordance with the laws of Ukraine.

The share of capital of the state-owned banks in the stockholder ownership capital of thebanking sector of Ukraine amounted to 16.8% (6.8% in 2007), in assets – 11.5% (8.0% in 2007),in credits granted – 9.6% (7.1% in 2007), in liabilities – 10.7% (8.1% in 2007) and in income12.7% (10.7% in 2007).

During 2008, the number of acting banks with the foreign capital participation grew from 47banks to 53 banks (forming 28.8% of the total active banks against 26.9% in 2007), including17 banks (no changes in number) established with 100% foreign capital.

Portion of the direct foreign capital participation in the authorized capital (registered) ofbanks of Ukraine formed 41.14%, and taking into account the indirect possession through thebank shareholders it formed 43.16% that was by 7.96 percentage points more than in 2007 (seeTable 25).

Table 25. ORIGINATION OF THE FOREIGN CAPITAL IN THE BANKING SECTOR OF UKRAINE2008, % For referebce: 2007

Country of registration Indirect participation Direct participation DirectNo of non-resident of Ukraine through bank of foreign foreign capital

as bank member shareholders capital participation, %

1. Cyprus 0.77 7.1 7.152. Austria 1.25 5.97 7.153. Russian Federation 5.45 3.424. France 3.77 4.415. Hungary 2.95 1.536. The Netherlands 2.78 2.907. Greece 2.20 0.128. Sweden 2.17 2.149. Poland 1.88 2.7810. Germany 1.51 0.2111. Italy 1.41 –12. Other12 2.88 3.39Total 2.02 41.14 35.20

Increase of participation in the statutory capital of the banking sector of Ukraine was markedfrom the non-residents of Cyprus, Russian Federation, Austria, Hungary, Sweden, Georgia,Greece (18 times more) and Germany (7 times more).

During 2008, the foreign capital amount in the authorized (registered) capital of banks ofUkraine raised by UAH 15.2 billion or twice, and equaled UAH 30.3 billion. Foreign capital sharein the registered statutory capital of acting banks of Ukraine grew from 35.0% to 36.7%.

During 2008, the banks with the foreign capital increased their share in the banking marketof Ukraine: portion of assets in the total assets of the banking sector grew from 49.4% to 56.6%,including the credit operation growth from 50.5% to 57.6%, and liabilities from 50.4% to 57.8%.

The number of branches according to the State Register of Banks formed 1343 that was by77 units less than in 2007, including 1 306 acting branches and almost 22 000 units. The num-ber of acting representative offices of the Ukrainian banks reduced by 8 units and amounted to52 including 40 active offices on the territory of Ukraine (48 in 2007) and 12 working abroad.

12 Kazakhstan, Ireland, United Kingdom, Luxemburg, United States of America, Georgia, Turkey,Canada, Switzerland, the Virgin Isles (British), Latvia, Finland, Island, the Bahama Isles, Slovakia,the Cayman Isles, Lithuania, Slovenia.

Major part of the banking institutions was concentrated in the developed industrial regionsof Ukraine: 62.0% of the total banking institutions located in Kyiv-city and in the Kyiv region, and25.0% concentrated in four regions: (7.6% and 5.4% in Dnipropetrovsk and Odesa regions,respectively; Donetsk and Kharkiv regions had 6% each). Ten regions have no acting bank(Vinnytsia, Zhytomyr, Kirovohrad, Mykolaiv, Rivne, Ternopil, Kherson, Khmelnytskyi, Cherkasyand Chernivtsi), and the banking services to the population were rendered by the branches andunits. Other regions of Ukraine had about 13% of the banking institutions.

More uniform territorial concentration was observed as regards the bank branches. Thelargest portion of acting branches is located in Kyiv-city and the Kyiv region (128 branches or9.8% of the total number) and in the Donetsk region (121 branches forming 9.3% of the totalnumber). The smallest number of branches (approximately, 2% of the total number per eachregion) was concentrated in three regions: Volhynian, Rivne and Chernivtsi. Each of the fol-lowing seven regions (namely, Dnipropetrovsk, Luhansk, Lviv, Odesa, Kharkiv, Poltava and theAutonomous Republic of the Crimea and Sevastopol-city numbered from 4.5% to 6% of thetotal branches available. In other 13 regions there were concentrated from 2.5% to 4% of thetotal number of branches per each of the regions.

During 2008, the following work was performed:1) in the bank registration issue:– newly established banks registered in the State Register of Banks: 7;– banks withdrawn from the State Register of Banks: 7;– branches included to the State Register of Banks: 19;– branches withdrawn from the State Register of Banks: 87;– representative offices of foreign banks, accredited: 6, including the following:

– representative office of HSBC Bank PLC in Ukraine (England);– representative office of the Bank of Cyprus, Public Company Limited, in Kyiv-city, Ukraine;– representative office of the Standard Chartered Bank (England);– representative office of the Balkan Investment Bank, AD Banja-Luka, in Kyiv-city,

(Republic of Serbia, Bosnia and Herzegovina); – representative office of the JSC ,,Balticums in Ukraine" (Latvia);– representative office of Bayerische Landesbank in Ukraine (Germany);– prior permits granted to establish a foreign capital bank: 2;– permits granted for banks to acquire the status of a foreign capital bank: 6;– representative office of the Ukrainian bank opened abroad: 1 (the JSC "Imexbank" in

Bucharest, Romania);– permits granted to the Ukrainian banks to establish the representative offices abroad: 4;– certificates of the bank registration, issued: 30;– permits granted to establish subsidiaries abroad: for 3 banks, namely:– JSB "Pivdennyi" (subsidiary "A/S Regionala Investiciju Banka", Republic of Latvia);– closed JSC "Privatbank" (subsidiary in Georgia, JSC "TAOBANK");– JSB "Industrialbank" (subsidiary in the Republic of Latvia).2) in the bank licensing issue: – banking licenses granted to the newly established banks: 9;– written permits granted to the newly established banks for carrying out particular opera-

tions: 7;– banking license and written permit granted to the bank which renewed its activities: 1;– banks for which the list of operations to be performed upon the written permit for particu-

lar transactions was enlarged: 33;

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– banking licenses and written permits to perform particular operations were replaced inconnection with change of the bank name: 16;

– written permits for carrying out particular operations were replaced in connection withchange of the list of operations.

3) in the issue of modifications and amendments to the banks' articles of association:– permits granted for acquiring or increasing the qualifying shareholding: for 40 banks;– modifications and amendments to the bank articles of association, registered and included in

the State Register of Banks: 199, including 116 made in view of the authorized capital increased.4) in other issues:– appointments approved for managing positions: 389 .One branch of the bank of Ukraine functioned abroad: the closed JSC "Privatbank" branch

in Cyprus, Nicosia, operating as an international banking unit.During 2008, no alterations in the legislative framework of Ukraine related to the bank reg-

istration and licensing took place.In order to improve the procedures for bank registration and licensing, norms and regula-

tions of the National Bank of Ukraine were amended as regards the following:– bringing in compliance with the Law of Ukraine "On Banks and Banking" of the require-

ment related to the amount of fully paid authorized capital necessary for a bank to obtain thebanking license (not less than ˆ 10 million by the official exchange rate of hryvnia against for-eign currencies as set by the National Bank of Ukraine on the day of entering into the estab-lishment agreement);

– increasing the requirements to the regulatory capital amount, necessary for a bank toobtain the written permit for carrying out the particular operations with foreign exchange valu-ables (to ˆ 10 and 15 million, respectively);

– canceling the requirements related to obtaining by a bank branch of the written permitfrom its bank for performing operations and further conformance of the permit with the region-al NBU branch at the place of the branch location;

– bringing in compliance with the Law of Ukraine "On Banks and Banking" of the require-ments related to the organizational and legal form according to which the banks may be estab-lished in Ukraine and to the authorized capital minimum at the time of the bank registration;

– canceling the requirements related to the regulatory capital minimum of not less than ˆ 3million, when opening a bank separate structural unit (branch, unit) on the territory of the banklocation region, and of not less than ˆ 5 million when opening a structural unit on the territoryof Ukraine. The additional requirement was introduced and if the bank complied with the normregarding, specifically, the regulatory capital minimum set by the National Bank of Ukraine, sucha bank might open the units;

– canceling the requirements concerning the decisions to be considered and taken by theNBU Commission on the supervision and regulation of the bank activities in relation to the pro-fessional skills and business reputation of candidates for the vacancies of deputy governors,board (of directors) members and deputy chief accountants and also concerning the informa-tion about the professional skills and business reputation of candidates for the vacancies of thegovernor, his/her deputies and members of the supervisory board;

– introduction of the procedure for qualifying the candidates for vacancies of the deputygovernors, board members, deputy chief accountant and also the governor, his/her deputiesand members of the supervisory board in compliance with the Law of Ukraine "On Banks andBanking" based upon the examination of documents (files) submitted.

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Annual Repor t 2008

2.4.5. Termination of the banks' activities During 2008, the number of banks under the liquidation procedure reduced by 6 units and

as of 1 January 2009, 13 banks were in the liquidation process (6.6% of those registered in theState Register of Banks), including 10 banks being liquidated according to the decision of theNational Bank of Ukraine and 3 banks – according to the economic court judgments. The assetsof banks under liquidation formed 0.2% of the total assets of the banking sector of Ukraine.

Reduction of banks under liquidation resulted from the following:– completion of the liquidation procedure in 6 banks and withdrawal of those banks from the

State Register of Banks of Ukraine;– renewal of the activities of 1 bank owing to its adhering to financial recovery measures. In 2008, in accordance with the resolution of the Board of the National Bank of Ukraine the

banking license was withdrawn from the open JSC "European Bank for Development andSavings" and the liquidation procedure was initiated for that bank.

As of 1 January 2009, the liquidation balance sheets and liquidator reports were approvedfor 3 banks: JSC "Alonge", JSB "Vidrodzhennia" (Renaissance) and the JSB"Donvuglecombank". Liquidation procedures for those banks are considered to be finalized.

The liquidation procedure for the "Ukraina" Bank comes to its end (the liquidation balancesheet and the bank's liquidator report were on the consideration of the NBU Commission onsupervision and regulation of the banks' activities as of 29.12.2008). Unsold assets and the listof the "Ukraina" Bank claims were passed to the management of the legal entity (Tornado Co.Ltd.) according to the agreement for further realization and satisfying the creditors' claims.

Unsold assets and the list of the JSB "Alonge" were passed to the management of the legalentity (Votum Co. Ltd.) according to the agreement, while unsold assets and the list of claimsof the liquidated "Ukrspetsimpexbank" were under the management of the commercial bank"Misto Bank" Ltd.

As of 1 January 2009, the remaining balance of assets in the banks under liquidationamounted to UAH 1676.9 million, the assets realized (returned) amounted to UAH 1210.5 mil-lion, payables acknowledged (according to the registers approved) were equal to UAH 3513.7million, payables satisfied by the liquidators were equal to UAH 981.8 million, the compensa-tion payments guaranteed by the Deposit Insurance Fund for Individuals were UAH 552.3 mil-lion, and the liquidator (liquidator commissions) costs were UAH 194.6 million.

In 2008, the work of liquidators (liquidation commissions) on returning of the banks' fundsand on settlements with creditors was marked by the following indicators: during the year, therealized (returned) assets amounted to UAH 69.4 million, which was 5.7% of the total assets real-ized (returned) for the whole period of liquidation of the banks mentioned; creditor claims paid bythe liquidators amounted to UAH 41.0 million (1.2% of the creditor claims acknowledged): the liq-uidator (liquidation commission) expenses formed UAH 10.4 million; the balance of the accumu-lated accounts of the banks as of 1 January 2009 was equal to UAH 43.6 million The portion ofcreditor claims paid has increased by 5.4 percentage points (from 38.3% to 43.7%).

In 2008, a substantial amount of funds from realization (returning) of the assets came fromthe following banks: JSB "Premier Bank" (UAH 61.6 million, open type JSC "European Bank forDevelopment and Savings" (UAH 16.9 million) and "Kyiv Universalny Bank" Co. Ltd. (UAH 11.9million).

The National Bank of Ukraine and the Deposit Insurance Fund for Individuals applied meas-ures to improve situation with payment of the creditor claims on the banks under liquidation and,primarily, payments for depositors – natural persons.

According to the Law of Ukraine "On the Priority Measures on Prevention of the AdverseEffect of the Financial Crisis and on the Amendments to Some Legal Acts of Ukraine", theDeposit Insurance Fund for Individuals, proceeding from the funding resources and owing to thefinancial support of the National Bank of Ukraine, increased the amount of funds ensured foreach depositor of the Fund member (temporary member), including the interest as accrued onthe day they became inaccessible, to UAH 150 thousand.

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In 2008, the payments on claims of individual depositors that were effected by the DepositInsurance Fund for Individuals amounted to UAH 232.7 million, or 42.1% of the total paymentswithin the compensation amount guaranteed.

Table 26. DYNAMICS OF MAJOR PERFORMANCE INDICATORS OF BANKS UNDER LIQUIDATION

(UAH, mln.)Growth (reduction)

Indicators 01.01.2008 01.01.2009 rates, %

Number of banks 19 13 –31.6Assets 1 388.4 1 676.9 20.8Vis-a-viz total assets of the banking sector, % 0.2 0.2 –Assets (realized (returned) 1 141.1 1 210.5 6.1Debtors' funds 1 404.4 1 299.7 –7.5Accounts to pay(according to recent balance sheets) 2 820.4 2 987.8 5.9Payables acknowledged, – out of the total 3 289.8 3 513.7 6.8

to natural entities 761.1 1 035.8 36.1Creditor claims paid by liquidators, out of them 940.8 981.8 4.4

to natural entities 339.7 336.4 –1.0Claims paid by the Deposit Insurance Fund for Individuals 319.6 552.3 72.8Portion of creditor claims paid, (%) 38.3 43.7 +5.4 p.p.Liquidation commission costs 184.2 194.6 5.6Balance of the accumulated account 15.6 43.6 2.8 times

As of 1 January 2009, the performance indicators of liquidators (liquidation commissions)on the realization of the bank liquidation procedure improved as compared with 2007 (seeTable 26). Growth rates of the realized (returned) bank assets formed 6.1% and those of thepayments made by the Deposit Insurance Fund for Individuals – 72.8%. Funds accumulated forthe settlements with creditors amounted to UAH 43.6 million

For 2008 the amount of creditor claims paid by the liquidators was equal to UAH 41.0 mil-lion, which was by 1.02% more than the correspondent amount in 2007. The Deposit InsuranceFund for Individuals paid the compensation funds for depositors – individuals to the amount ofUAH 232.7 million (by 63.8% more than in 2007). Assets realized (returned) were equal to UAH69.4 million which was by 68.4 % more than in 2007.

In 2008, the re-organization of the joint-stock commercial bank "HFB Bank, Ukraine" tookplace through merging to the "Unicredit Bank" Co. Ltd. with the right of the non-balance sheetunit (the re-organization period was from 18.05.2007 to 25.02.2008).

There was launched the re-organization procedure through merging of the joint-stock bank"Factorial Bank" to the open type JSC "CEB Bank" with the right of the non-balance sheet unit.

According to the requirements of the final provisions of the Law of Ukraine "On theAmendments to Some Legal Acts of Ukraine on the Forms of Bank Establishment and theAmount of the Authorized Capital", 4 banks which had been established as the closed type jointstock companies or companies with limited responsibilities were re-organized through transfor-mation into the open type companies. Those were the following: open type JSC"Volodymyrskyi", open JSC "Lviv", open JSC "BM Bank" and open JSC "Artem Bank".

In 2008, the National Bank of Ukraine applied measures on the improvement of the nor-mative and legal acts which regulated the realization of the liquidation procedure and the bankre-organization. Amendments have been made to Chapter VI "Withdrawal of the banking

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Annual Repor t 2008

license and liquidation of the bank" of the Regulations on applying the enforcement measuresby the National Bank of Ukraine for violation of the banking laws related to the following:requirements of the National Bank of Ukraine to the liquidator and the persons involved in thebank liquidation; entering into agreement with the liquidator; payment procedure for the liq-uidator work and approval of the cost budget for the liquidator; notification of the withdrawal ofthe banking license and the appointment of the liquidator; procedure for opening of the accu-mulated account purposed for the fulfillment of the liquidation procedure in the bank under liq-uidation; preparatory measures to be applied by the liquidator to satisfy the creditor claims;approval by the National Bank of Ukraine of the sale procedure for the bank property (assets),its composition, terms and conditions of acquiring; list of priority for satisfying the creditorclaims; transfer of the bank assets unsold under the management of the legal entity determinedby the National Bank of Ukraine; finalizing the liquidation procedure of a bank, etc.

The National Bank of Ukraine has developed and approved the Regulations on the partic-ular features of the bank re-organization according to the decision of the bank owners.

Problems, related to the completion of the bank liquidation procedure within the time deter-mined and to the fulfillment of the primary task of the liquidators on accumulation of the liqui-dation mass (funds) in order to satisfy the creditor claims as much as possible, still remainedpressing.

Evasion of debtors and their guarantors from observing the commitments to banks underthe credits received and delaying the court processes brought to violation of the periods of thebank liquidation procedure specified by Article 88 of the Law of Ukraine "On Banks andBanking". The liquidation procedures with 8 banks under liquidation (62% of the total numberunder liquidation) have been running for more than 4 years.

Breaking the periods of the bank liquidation procedures needs the control to be enhancedby the National Bank of Ukraine over the work of liquidators (liquidation commissions) and theimprovement of the effective law of Ukraine in the bank liquidation issue.

2.5. FOREIGN EXCHANGE CONTROL AND LICENSINGDuring 2008, the National Bank of Ukraine granted 644 individual licenses, general licens-

es, approvals and special permits (in 2007 it was 1524).The banks were granted 35 individual licenses for conducting operations with foreign

exchange valuables.Legal entities – non-banking institutions, and natural persons were given 609 individual

licenses, general licenses, approvals and special permits, including the following: – individual licenses for conducting operations with foreign exchange valuables: 571;– general licenses given to the non-banking financial institutions for conducting operations

with foreign exchange valuables: 20;– approvals to transfer funds by the residents outside Ukraine under the agreements that

stipulate for the works and services to be rendered by the non-residents: 17;– special permits to import foreign exchange valuables in Ukraine: 1.Alongside with the above mentioned, in 2008, 212 amendments were made to the previ-

ously granted individual licenses, general licenses and approvals; 71 individual licenses and 1general license were cancelled and the cancellation of 1 individual license was withdrawn.

During 2008, the National Bank of Ukraine effected control over compliance by the author-ized banks and the non-banking institutions with the requirements of the foreign exchange lawsby means of the following:

– conducting the on-site and paper (off-site) inspections of the authorized banks and thenon-banking institutions;

– control over the justification of conclusions made by the regional branches by the resultsof the authorized banks' examinations;

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– applying penalties to banks with regard to the revealed facts of violations of the foreignexchange legislature;

– participation in the review of appeals from the authorized banks and elaboration of theconclusions (opinions) for the Appeal Commission of the National Bank of Ukraine concerningthe appropriateness of calling the authorized banks to account for the infringement of the for-eign exchange legislature of Ukraine.

1003 examinations of banks have been conducted, including 621 scheduled examinationsand 382 out of plan; 403 examinations were of the complex nature.

In view of the facts of violating the foreign exchange laws, 894 resolutions were passed oncalling the authorized banks to account for the infringement of the foreign exchange legislation(specifically, the Decree of the Cabinet of Ministers of Ukraine "On the System of ForeignExchange Regulation and Foreign Exchange Control) to the amount totaling UAH 2.8 million.

Among the violations of the foreign exchange legislation 74.9% of the cases were related tothe delayed information, concealing or distortion of the reporting on the foreign exchange trans-actions of banks; 18.6% were connected with failure to perform the agent functions of the foreignexchange control; 3.1% related to violation of the terms and conditions of foreign currency tradesin the inter-bank foreign exchange market; 2.3% resulted from using the foreign currency as alegal tender on the territory of Ukraine with no individual license of the National Bank of Ukraine;1.1% came from the failure to meet the terms and procedure to declare the foreign exchangevaluables that belonged to the residents of Ukraine and were outside of Ukraine.

Penalties charged upon the major part of the resolutions (812) on bringing to responsibilityfor violations by banks of the foreign exchange legislature, amounted to UAH 1.3 million.

In 2008, the National Bank of Ukraine conducted 2359 checks of the exchange centers(their total number was 1104), including 886 checks of the exchange centers belonging to thebanks and 1473 checks of the exchange centers which operated based upon the agent agree-ments concluded with banks.

During the said examinations of the foreign exchange centers, 401 violations of the bank-ing laws were revealed, including 128 violations made by the exchange offices belonging to thebanks and 273 cases – by the exchanges operating according to the agent agreements withbanks.

In order to optimize the procedure for granting licenses to carry out the foreign exchangeoperations in 2008, the National Bank of Ukraine made alterations to the Regulations on theprocedure for granting general licenses to the non-banking financial institutions and the nation-al post operator for carrying out the foreign exchange operations.

In addition, the instruction on the order of exercising control over the export-import opera-tions was brought in compliance with the requirements of the Law of Ukraine "On the Procedureof Effecting Payments in the Foreign Currency".

2.6. PAYMENT SYSTEM OF UKRAINE2.6.1. Interbank settlements

The year of 2008 has become the second year of the commercial operation of the Systemof Electronic Payments (SEP) of the new generation in the National Bank of Ukraine (SEP-2).

As of 1 January 2009, the total number of institutions being the SEP members was 1550,including 182 banks of Ukraine, 1304 bank branches, 28 State Treasury bodies of Ukraine and36 institutions of the National Bank of Ukraine.

The SEP embraced the whole banking system of the country, carrying out 98.5% of theinterbank transfers in the national currency.

The number of electronic settlement documents under the initial payments and the elec-tronic settlement notices that were processed in the SEP during 2008 grew by 9% as regardstheir number and by 38.8% as regards the amount of the initial payments (see Figure 57).

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Annual Repor t 2008

During 2008, 349.0 million of initial payments and the payment orders totaling UAH 7992.4 bil-lion were processed in the SEP, including 348.3 million file mode payments of UAH 7594.5 bil-lion and 691 thousand payments in the real time mode of UAH 397.9 billion. 318.6 million trans-actions were made by the banking institutions (91.3% of the total initial payments).

Figure 57. Number of initial payments in SEP in the file mode

Portion of the settlement documents processed in the SEP under the initial payments ofless than UAH 1000 formed 71.0% of their total number and the amount of transfers againstthose documents was insignificant being equal to 0.6% of the total funds transferred.

Daily average balance of the SEP members' accounts formed UAH 30.9 billion. Turnoverfactor of the accounts of the SEP members during the year was 1.0 compared to 0.7 in 2007.

According to the rules of the SEP operation, the SEP members in view of their needs maydetermine their mode of operation on their own. Therefore, as of 1 January 2009, 72 members(39.1% of their total number) were working in the SEP with one of the models servicing the con-solidated correspondent account, and the rest 112 participants (60.9% of the total number)operated with the independent correspondent account.

Figure 58. Settlements distribution by models of consolidated account servicing as at 1 January 2009

Among the participants operating with the models servicing the consolidated correspondentaccount, the third model appeared to be the most demanded (favored by 52 banks); 14 bankspreferred the forth model; 5 banks chose the seventh model and the State Treasury of Ukraineoperated with the eighth model. In 2008, the largest number of payments was made by thebanks operating with the third model (see Figure 58).

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2.6.2. Development of the payment card systemsAs of 1 January 2009, 139 banks (75.5% of the total number of banks possessing the bank-

ing licenses) were the members of the national and international payment card systems andmade issuance and acquiring of the payment cards. During 2008, 12 more banks became themembers of the relevant payment systems and started the issuance and servicing of the pay-ment cards.

Total number of the payment cards issued by the banks of Ukraine (payment cards againstwhich at least one operation per year was performed) reduced by 6.3% in the reporting yearand amounted to 38.6 million pieces. Out of the total number of payment cards, the share ofpersonal cards was 98.7%, the magnetic strip cards formed 93.7%, the debit cards formed76.6% and those with the payment and cash delivery functions – 96.5% .

In 2008, the number of automatic telling machines servicing the payment cards formed 28.0thousand units, of the payment terminals – 116.7 thousand units and the number of imprinters– 82.1 thousand units, which was by 33.6%, 23.8% and 50.9% more, respectively, than in 2007.

As of 1 January 2009, over 634.4 million operations with applying the payment cards issuedby the banks of Ukraine were carried out to the amount of UAH 372.4 billion, which was by19.3% and 65.4% more, respectively, than in 2007 (see Figure 59).

Figure 59. Dynamics of operations number and volume on payment cards issued by Ukrainian banks

In 2008, the major portion of operations was made by the holders of the payment cards ofthe Ukrainian banks within the own network of the issuing bank (86.7%), 12.5% operations wereperformed in the network of other resident banks and 0.8% operations performed abroad.

By the amount of operations performed in 2008 on the payment cards issued by the banksof Ukraine, 97.4% of their total amount fell on the operations carried out on the territory ofUkraine, including 92.7% in the own network of the issuing bank and 7.3% in the network ofother resident banks. The operations performed abroad formed 2.6 %.

During 2008, the amount of operations on cash delivery grew by UAH 138.4 billion as com-pared with 2007, and was equal to over UAH 355.4 billion (95.4 % of the total operations per-formed with applying the payment cards); non-cash payments rose by UAH 8.9 billion (to theamount of UAH 17.0 billion that formed 4.6 % of the total operations performed with applyingthe payment cards) (see Table 27).

During 2008, the average annual turnover per one payment card grew by 53.8% as com-pared with 2007 and amounted to UAH 9.3 thousand.

The highest average annual turnover per one payment card in 2008 was marked with theNSMEP (National System for Mass Electronic Payments)– UAH 16.4 thousand; compared to2007 the increase was equal to 33.3%. Much lower average annual turnover per one card in

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Annual Repor t 2008

2008 was marked with the international payment system VISA (UAH 9.8 thousand) andMasterCard (UAH 8.1 thousand), as well as with the group of the domestic one issuer systems(UAH 6.9 thousand).

Table 27. USE OF PAYMENT CARDS IN 2008Amount of operations, UAH, billion Number of operations, million units

Use of Cash Cashless Cash Cashlesspayment cards delivery payments Total delivery payments Total

In the own network of issuing bank 330.9 5.3 336.3 512.5 37.6 550.1In the network of other resident banks 20.0 6.4 26.4 53.0 26.2 79.2In the network of other non-resident banks 4.5 5.3 9.7 1.7 3.4 5.1Total 355.4 17.0 372.4 567.2 67.2 634.4

In 2008, the NSMEP development was still in progress; the banks and the Payment organ-ization of the system implemented the innovation projects and technologies (see Table 28).

As of 1 January 2009, the NSMEP consisted of 52 member banks (including the NationalBank of Ukraine) and 7 participants. During the reporting year, 12 more banks joined theNSMEP, including 4 banks from the 1st and 2nd groups of banks.

Table 28. NSMEP PERFORMANCE INDICATORS IN 2004–2008Number of Annual Average sum

payment cards Number of turnovers, of interbankYear issued, terminal UAH operations,

Thous. Pcs equipment, pcs. million UAH

2004 373 846 6931.1 3452005 240 576 9739.2 3312006 287 778 12472.9 3532007 385 1266 18117.3 5932008 607 1291 25049.7 730Total 2382 5752 76691.7 –

In 2008, the implementation of the pilot project "Student Payment Card" went on for the uni-versities of the I-IV accreditation levels. By the start of 2009, almost 70 thousand of the elec-tronic student payment cards have been issued which was by 31 thousand pieces more than atthe beginning of 2008.

During 2008, the dynamic progress of the Internet payments through the NSMEP wasobserved. In order to provide the Internet payments through the NSMEP, two special paymentsites were functioning, and their technological facilities were similar to payments made througha bank's cashier's desk.

In 2008, the commercial operation of the mobile payments (known as "BANK-O-PHONE"trademark) was launched, and it allowed to control and manage the banking account and toeffect payments with the mobile phone.

During 2008, the work on realization of the projects using the NSMEP know-how and soft-ware was maintained between the National Bank of Ukraine, the State Treasury of Ukraine andthe State Customs Service of Ukraine and also the Deposit Insurance Fund for Individuals.

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2.6.3. Basic results of the international systems' operation for transfer of funds between individuals without opening the accounts in 2008

As of 1 January 2009, 20 international systems established by the non-residents for thetransfer of funds between the individuals without opening of the accounts were operating on theterritory of Ukraine (18 systems as of 1 January 2008). Participants of such systems were about150 banks of Ukraine, one non-banking financial institution and the National Post OperatorUNPPO "UkrPost".

In 2008, the total trans-border transfers received in Ukraine with applying the internationaltransfer systems and established by the non-residents grew almost by one fourth as comparedwith the previous year and amounted to USD 2.5 billion, while the amount of funds transferredoutside Ukraine grew twice and was equal to USD 0.4 billion in the equivalent. The averageamount of one transfer into Ukraine grew by USD 69 in 2008 as compared with the averageamount in 2007 and formed USD 618 in the equivalent. The average amount of one transferoutside Ukraine grew by USD 244 and formed USD 625 in the equivalent. Moreover, during2008, the amount of funds transferred by the natural entities within Ukraine with applying theinternational transfer systems implemented by the non-residents formed USD 29 million in theequivalent.

The largest amounts of funds came to Ukraine with applying the international transfer sys-tems established by the non-residents from Russia (47.9%), USA (9.2%), Italy (6.5%), Spain(6.3%) and Great Britain (3.5% of the total funds received); the largest amounts of funds trans-ferred from Ukraine were sent to Russia (35.2%), Georgia (9.0%), Armenia (6.5%), Uzbekistan(6.5%) and USA (4.3% of the total funds transferred).

The portion of transfers that came to Ukraine with applying four systems established by theUSA residents formed 55.4% of the funds received, and with those established by the residentsof Russian Federation (10 systems)) – 41.7%. The largest amounts of funds were transferredinto Ukraine with applying the following international transfer systems: Western Union (USA) –43.2%, "Unistream" (Russian Federation) – 16.3% and MoneyGram (USA) – 12.0% of the totalfunds received.

Also, in Ukraine, the international systems for transfer of funds were operating, the paymentorganizations for which were the banks of Ukraine. Using the international transfer systemPrivatMoney, established by the closed type JSC "PrivatBank", USD 0.3 billion came to Ukrainein 2008 and USD 58.5 million in the equivalent were transferred outside Ukraine.

Particular banks of Ukraine which established their systems for transfer of funds betweenthe individuals, concluded agreements of cooperation with the international transfer systems,the payment organizations for which were the non-residents of Ukraine. By the result of suchcooperation, USD 68 million came to Ukraine in 2008, and USD 38 million in the equivalentwere transferred abroad.

The total amount of funds which came into Ukraine with applying the international systemsfor transfer of funds between the individuals that had been established both by the residentsand the non-residents was equal to USD 2.9 billion in 2008, and funds transferred from Ukraineamounted to USD 0.5 billion in the equivalent. Ukraine remained to be a recipient country forthe international money transfers, as far as the amount of funds transferred into Ukraineexceeded 6 times the amount of funds transferred outside Ukraine.

2.6.4. Cash performance of the budgets of UkraineIn accordance with the Budget Code of Ukraine (Art. 48 and Art. 78) the treasury form for

servicing of the state and local budgets was applied in Ukraine, that specifically stipulated forthe management of funds available with the State Budget of Ukraine and with the public off-budget funds to be made by the State Treasury of Ukraine, as well as for the cash servicing ofthe budget fund administrators.

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Annual Repor t 2008

The National Bank of Ukraine was a treasurer of funds of the State Budget of Ukraine thatwas realized through opening of the Single Treasury Account with the National Bank of Ukraineand servicing its payments through the System of Electronic Payments (SEP) of the NationalBank of Ukraine with applying the internal payment system of the State Treasury of Ukraine.Terms and procedure for servicing funds of the State Budget and local budgets accounted onthe Single Treasury Account were determined in the Agreement concluded between theNational Bank of Ukraine and the State Treasury of Ukraine. According to Article 30 of the Lawof Ukraine "On the State Budget of Ukraine for 2008 and Amendments to be Made to SomeLegal Acts of Ukraine", the services of processing the payment documents and the informationwithin the system of electronic payments of the National Bank of Ukraine were free of charge.

Functioning of the Single Treasury Account in the SEP of the National Bank of Ukraine pro-vided the high quality of settlements under the budget funds, their reliability and security; con-siderably reduced the payment transfer periods; increased the budget fund turnover; providedwith the possibility to compile daily operative reporting on accounting of incomings and expen-ditures of the state budget and allowed more effective management of the general balance(residual) of cash resources.

As of 1 January 2009, the total residual funds of the state and local budgets, off-budgetfunds and other funds of customers amounted to UAH 13 billion which was by UAH 2.4 billionless than the relevant residual funds on the appropriate date of the previous year. However, thebalance of funds on the Single Treasury Account grew almost 1.8 times and as of 1 January2009, amounted to UAH 7.7 billion against UAH 4.3 billion, as of 1 January 2008.

Number of payments performed by the State Treasury of Ukraine and its bodies through theSEP of the National Bank of Ukraine amounted to over 21.1 % of the total payments in the sys-tem, including the initial payments of about 8.6% of the total documents which came to the SEPof the National Bank of Ukraine in the reporting year.

According to the laws in force and the normative and legal framework of the National Bankof Ukraine, as of 1 January 2009, 7278 budget institutions had 22430 deposit accounts with thebanks of Ukraine, including 20554 demand deposits and 1876 time deposits.

2.7. SERVICING OF THE INTERNAL (DOMESTIC) DEBTS OF UKRAINE

According to the laws in force, the National Bank of Ukraine kept on to perform operationson servicing of the public debts related to allocation of the government securities, their redemp-tion and paying the securities income.

During 2008, 212 auctions on the allocation of T-bills were arranged, of which only 50 wererealized. By their results, UAH 9.8 billion were attracted to the State Budget of Ukraine, that was2.7 times more than in 2007 (see Table 29). As regards the other 162 auctions, the Ministry ofFinance of Ukraine took the decision not to realize the T-bills because of the disparity betweenthe price proposals (bids) of the potential buyers and the real value of money or because of theabsolute lack of bids to acquire the T-bills. Opposite to the previous year, in 2008, the alloca-tion of T-bills was carried out during the whole year.

In addition, in order to observe Article 2 of Law ¹639-VI of Ukraine dated 31.10.2008 "Onthe Priority Measures to Prevent the Adverse Effect of the Financial Crisis and on Amendmentsto Some Legal Acts of Ukraine" with the purpose to increase the establishment of the author-ized capital for banks, the Ministry of Finance of Ukraine issued the T-bills totaling UAH 13.8billion during November through December 2008, that formed 58.5% of the total T-bills allocat-ed in 2008.

During 2008, the Ministry of Finance of Ukraine was allocating the middle-term T-bills, theaverage maturity of which was 1047 days and it rose by 181 days as compared with 2007. Onlyby the end of December the Ministry of Finance of Ukraine allocated the short-term and long-term T-bills with the average maturity of 44 days and 2653 days, respectively.

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Table 29. T-BILLS ALLOCATION ON THE PRIMARY MARKET Information:

Change to Change toIndicators 2008 previous 2007 previous

year year

Number of auctions 212 47 165 87Realized 50 22 28 –9Non-realized 162 25 137 96

Funds attracted to the State Budget of Ukraine, UAH, billion 9.8 6.2 3.6 2.0T-bills issued to increase the establishment of the authorized capital for banks, UAH, billion 13.8 – – –Average weighted yield 11.86 5.15 p..p. 6.71 –2.55 p.p.

Average weighted yield of T-bills attracted to the State Budget, % 14.85 8.14 p.p. 6.71 –2.55 p.p.Average weighted yield of T-bills issued to increase the establishmentof the authorized capital for banks, % 9.74 – – –

Average maturity, days 1047 181 866 –119Redemption amount and income payment of the previous issue T-bills, UAH, billion. 4.4 1.5 2.9 –1.9

During the reporting period, the T-bills were in demand of, primarily, the domestic investors.Notwithstanding the high reliability of the T-bills in comparison with other financial instruments,in 2008, the interest of non-residents in acquiring the government securities that was observedin 2006 and 2007, tended to reduce. Thus, during 2008, the amount of T-bills with the non-res-ident possession decreased by UAH 1.6 billion and as of 1 January 2009 it was equal to UAH467.3 million, that formed 1.6% of the total T-bills in circulation (reduction in 2007 was equal toUAH 0.6 billion).

Along with increasing the average turnover period of the T-bills, their average weightedyield also grew (11.86% in 2008 vis-à-vis 6.71% in 2007).

In 2008, the Ministry of Finance of Ukraine redeemed the T-bills and paid the income to theirholders totaling UAH 4.4 billion, including the principal debt redemption of UAH 3.4 billion, andthe yield payment of UAH 1.0 billion, and thus, it fulfilled all its commitments against varioustypes of the government securities.

Because of the fact that the amount of T-bills redeemed was higher than the amount of T-billsallocated, the indebtedness of the Government of Ukraine against the public bonds (at face value)grew by UAH 20.0 billion in 2008 and by the end of the year it amounted to UAH 29.2 billion.

2.8. LEGAL ENVIRONMENT OF THE BANKING SYSTEMDuring 2008, the National Bank of Ukraine kept on to improve the banking laws and nor-

mative framework, and actively participated in search of the methods for the legal settlement ofpressing issues related to the capitalization of banks at the government expense; prevention ofthe one-party change in terms and conditions of the credit agreements; granting the credit sup-port for the construction, agricultural/industrial and bread-baking areas. More than 26 "anti-cri-sis" draft laws were reviewed and by the results of their consideration the remarks and propos-als were submitted to the Parliament of Ukraine.

In addition, in the reporting year the National Bank of Ukraine elaborated and presentedproposals to 58 draft laws that had been worked out by the central executive authorities and to54 draft laws submitted to the Parliament for consideration. Also prepared were the legislativeproposals which were used by the people's deputies as the fundamental principles for the fol-lowing draft laws: "On Amendments to Some Laws of Ukraine" (concerning the bank liquida-tion); "On Amendments to the Law of Ukraine "On the Deposit Insurance Fund for Individuals"(new edition).

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Annual Repor t 2008

In 2008, the National Bank of Ukraine issued 120 norms and regulations, out of which 61were registered in the Ministry of Justice of Ukraine and 59 – in the Legal Department of theNational Bank of Ukraine, since they were not subject to the state registration. In 2008, no rejec-tions for the state registration of the normative and legal acts of the National Bank of Ukraineby the Ministry of Justice of Ukraine took place.

Major part of the normative acts, that were adopted by the National Bank of Ukraine in 2008,introduced the alterations to the valid norms and regulations, improving the normative base. Asmall part of the acts regulated the new areas of the bank activities. Thus, the National Bank ofUkraine approved the Regulations on the electronic money in Ukraine, the Rules for provision-ing funds under the deposits and credits (loans) attracted by the authorized bank from the non-residents in foreign currency, the Accounting rules for operations with applying the paymentcards of the National System for Mass Electronic Payments in the National Bank of Ukraine.

The regulatory activities of the National Bank of Ukraine was performed in accordance withthe Plan of elaboration of the draft regulatory acts for 2008. There were worked out 6 draft reg-ulatory acts, of which 4 were made public. Almost 90 proposals and remarks from the legal enti-ties, including the banking associations, were addressed to the two draft regulatory acts pub-lished and some proposals were partially accounted by the National Bank of Ukraine. No pro-posals or remarks came from the legal and natural entities as regards two other draft regulato-ry acts published. At the present time, none of the prepared draft regulatory acts wereapproved.

Further work in accordance with the Plan of Actions on the realization in 2008 of theNational Program for adjustment of the laws of Ukraine to the laws of the European Union wasin progress. The National Bank of Ukraine worked out and participated in the elaboration andtracking of 6 draft laws and the Concept for protection of rights of the consumers of the non-banking financial services in the Parliament of Ukraine. Moreover, the provisions of theEuropean Union laws as regards the regulation of the electronic money activities in Ukraine andmonitoring of the said activities were implemented in 10 norms and regulations of the NationalBank of Ukraine. In particular, it was stipulated to establish the regulatory limits permitting theelectronic money to take its potential advantages and also to implement the prudential super-vision over the institutions operating in the area of the electronic money issue and circulation inorder to ensure its reliable operation and financial integrity. Law adjustment was also performedin the areas of using the additional instruments of refinancing and the mechanisms for regula-tion of the money and credit market; establishing the additional measures to ensure the bank-ing secret during the bank rehabilitation and realization of the bank liquidation procedure, etc.

In 2008, the National Bank of Ukraine kept on to submit claims and complaints. In particu-lar, the National Bank of Ukraine, its regional branches and structural units submitted the fol-lowing:

– 49 claims totaling UAH 9.5 million were directed to the court (18 claims of UAH 1.7 mil-lion were satisfied; 4 claims of UAH 0.2 million were rejected; 8 claims of UAH 0.04 million werestopped to consider; 17 claims of UAH 7.5 million are under consideration; 1 claim was with-drawn and 1 case was terminated);

– 35 complaints of UAH 2.0 million (20 complaints of UAH 1.1 million were satisfied; 2 com-plaints of UAH 0.04 million were withdrawn; 1 complaint of UAH 0.04 million was rejected; 1complaint of UAH 0.08 million is under consideration and 11 complaints of UAH 0.8 millionremained with no consideration).

In 2008, the National Bank of Ukraine, its regional branches and structural units wereclaimed as follows:

– 71 claims to the total amount of UAH 3.4 million (5 claims of UAH 0.6 million were satis-fied; 15 claims of UAH 0.7 million were rejected; 42 claims of UAH 1.8 million are under con-sideration; 3 claims of UAH 0.2 million remained with no consideration; 4 claims of UAH 0.1 mil-lion were terminated and 2 cases were stopped to consider);

– 2 claims of UAH 2.4 thousand, of which one claim was rejected and another one was ter-minated (closed).

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2.9. RISK MANAGEMENT IN THE NATIONAL BANK OF UKRAINE In 2008 the risk management in the National Bank of Ukraine was performed on the regu-

lar basis in order to maintain the safe risk level in the banking activities that promoted to theeffective realization of the bank primary functions determined by the laws of Ukraine.

Risk influence on the assets, liabilities and the capital of the National Bank of Ukraine wasreduced through the establishment of certain conditions, quality restrictions and quantity limitsrelated to the operating processes that was reflected in the normative and legal acts of thebank.

Safe level of risks in the activities of the National Bank of Ukraine stipulated for the effec-tive management of assets and liabilities of the National Bank of Ukraine, observing therequired liquidity ratio of assets and meeting the restrictions imposed by the legislature.

The risks which affected the operating processes of the National Bank of Ukraine wereunder control in order to ensure that the possible losses, if any, were not higher than the leveldetermined by the bank authorities.

2.10. FINANCIAL MONITORING ON PREVENTION OF USING THE BANKING SYSTEM FOR LEGALIZATION (LAUNDERING)OF PROCEEDS OBTAINED FROM CRIME

In 2008, the National Bank of Ukraine kept on to take measures aimed at prevention ofusing the banking system for legalization of criminal proceeds and terrorism financing.

The National Bank of Ukraine was active in the elaboration of the draft law of Ukraine "OnAmendments to Some Legal Acts of Ukraine Related to Prevention of the Legalization ofProceeds Obtained from Crime or Terrorism Financing", purposed to introduce the differentialapproach to the identification and learning of the customers based on the assessment of theappropriate risks. Moreover, it was aimed at the implementation to the laws of Ukraine of thecurrent edition of 40 Recommendations and IX Special Recommendations of the FATF, normsof Directive 2005/60/EC of the European Parliament and Council dated 26.10.2005 "OnPrevention of Using the Financial System for Money Laundering and Terrorism Financing" andDirective 2006/70/ÅÑ dated 01.08.2006 "On Determining the Implementation Measures forDirective 2005/60/ÅÑ of the European Parliament and Council as regards the definition of theterm "statesmen" and the technical criteria to simplify the procedure of the due diligence asregards the customers and to withdraw the principles of the financial activities conducted fromtime to time or within the limits set".

During the year, the National Bank of Ukraine regularly traced and informed the banks ofUkraine on the decisions of the UN, FATF, MONEYVAL (EC Special Committee) and the rele-vant national bodies, specifically, the Office on Prevention of the Financial Crimes attached tothe USA Ministry of Finance (FinCEN) as regards prohibition and restriction of establishing thebusiness relations and performing the financial operations with the states and natural and legalentities not applying or applying insufficiently the FATF Recommendations.

The representatives of the National Bank of Ukraine within the Government of Ukraine del-egation took part in the 26th meeting of the EC Special Committee (MONEYVAL) held inStrasbourg and also in preparing of the 3rd Round arranged in September – October of theassessment of the effectiveness of the system for prevention of legalization (laundering) of pro-ceeds obtained from crime and terrorism financing in Ukraine.

The National Bank of Ukraine participated in preparing and realization of the Plan of Actionsfor 2008 on prevention and counteraction of the legalization (laundering) of proceeds obtainedfrom crime and terrorism financing. The Plan was approved by the joint resolution of the Cabinetof Ministers of Ukraine and the National Bank of Ukraine. The NBU also took part in the workof the Standing Working Group on the investigation of methods and trends in laundering of theproceeds obtained from crime.

In 2008, in order to establish the cooperation between the controlling and law enforcement

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bodies, the National Bank of Ukraine realized measures stipulated by the Program of coopera-tion between the National Bank of Ukraine, General Prosecutor Office of Ukraine, Ministry ofInternal Affairs of Ukraine, Security Office of Ukraine, State Committee for Financial Monitoringof Ukraine and State Tax Administration of Ukraine as regards the promptly revealing of opera-tions performed in breach of the laws in the banking area for 2007-2008.

According to the Law of Ukraine "On Banks and Banking" the banks and the bank branch-es were examined as regards their compliance with requirements of the legislature in the areaof prevention and counteraction of the legalization (laundering) of proceeds obtained from crimeand terrorism financing. During 2008, 322 inspections were conducted including 190 inspec-tions of banks and 132 inspections of the branches. By the result of the inspections, 4301 casesof violation of the laws in force have been revealed in the mentioned area.

The National Bank of Ukraine applied the enforcement measures to the banks and bankofficials, namely:

– written warnings sent (28);– penalties imposed on the banks (23);– administrative penalties charged from the bank managers and officials (14);– resulted from the inspections, two banks were restricted to perform certain banking oper-

ations with high risk level and four bank officials were temporary removed from the positions.In 2008, in Ukraine there were registered 1.1 million financial operations totaling nearly

UAH 1.1 trillion that appeared to be the objects of financial monitoring, of which 91.5% opera-tions to the amount of about UAH 831.6 billion were informed to the State Committee ofFinancial Monitoring of Ukraine that formed 90% of the total information received by the men-tioned body.

2.11. INTERNATIONAL COOPERATION2.11.1. Relationships of the National Bank of Ukraine

with central banks and banking institutions of other countriesIn 2008, cooperation of the National Bank of Ukraine with central banks and banking insti-

tutions of other countries was developing rather dynamically. Management and officials of theNational Bank of Ukraine took part in more than 40 international events, specifically, in the vis-its of the delegation of the National Bank of Ukraine headed by the NBU Governor to thePeople's Bank of China and headed by the First Deputy Governor to the Central Bank ofIceland; delegations of the National Bank of Ukraine to the Mint in Pert (Australia). The coop-eration between the National Bank of Ukraine and the National Bank of the Republic of Belaruskept on within the Advisory Council of the central banks of Ukraine and the Republic of Belarus.

In order to exchange experience and get to know the current economic situation and thebanking system progress, there were meetings arranged between the management and officersof the National Bank of Ukraine and the representatives of central banks of other countries, for-eign and diplomatic institutions, namely: National Banks of the Republic of Belarus,Kazakhstan, Czechia, Israel, Poland, Slovakia, the USA and Japan Embassies to Ukraine,Japan Bank for International Cooperation, Japan Banking Corporation "Sumitomo Mitsui",Deutche Bank, public corporation "CEB Bank", UniCreditbank (Italy), the bank "IntesaSanPaolo" (Italy), Savings Bank of Russia, Bank of Latvia, and others.

The National Bank of Ukraine participated in the regular meeting of the Central BankGovernors' Club of the Central Asia, the Black Sea and the Balkan countries (Sarajevo, Bosniaand Herzegovina); in the 3rd joint meeting of the Ukrainian/German Top Level Group in theeconomic cooperation between Ukraine and the Federative Republic of Germany (Berlin, FRG)and in the work of the joint bilateral inter-government commissions, in particular, the Inter-gov-ernmental Ukraine-Poland Commission in the economic cooperation issue.

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2.11.2. Cooperation of the National Bank of Ukraine with the international financial and other organizations

In 2008, the National Bank of Ukraine developed further cooperation with the internationalorganizations and also provided the realization of the Strategy for cooperation with the interna-tional financial organizations for 2006-2008 approved by the Cabinet of Ministers of Ukraine andof the new Strategy for Partnership of the World Bank and Ukraine for 2008-2011.

Cooperation with the World BankCooperation with the International Bank for Reconstruction and Development (hereinafter,

IBRD or World Bank) was realized according to the Strategies approved.Aimed at the financial support of the State Budget of Ukraine, the National Bank of Ukraine

together with the Government of Ukraine launched implementation in 2008 of the third stage ofthe WB project "Development Policy Loan" (hereinafter, DPL-3) through the realization of thePlan of Actions on keeping to the DPL-3 terms and conditions with taking into account the com-mitments of Ukraine specified in the letter of the Government of Ukraine addressed to the WorldBank as regards the development policy and the Matrix of the institutional and strategic resultswithin the above project.

During the reporting period, the National Bank of Ukraine cooperated with the Governmentof Ukraine in order to elaborate and realize joint with the World Bank projects which promotedto the development of the banking system, in particular, the following projects: "EnlargedAccess Policy to the Markets of Financial Services", "Development of the State StatisticsSystem for Monitoring of the Social and Economic Transformations", "Export Development-II".In 2008, the elaboration of the new project related to the financial system recovery was initiat-ed together with the World Bank.

In 2008, within the Credit Line for support of the local executive bodies which took on theirbalance sheets the social infrastructure objects in the regions where the coal mines have beenclosed, three new projects of USD 1.4 million were approved, of which USD 1.3 million weredisbursed. During the time of realizing the credit lines for micro-, small and medium-sized enter-prises in the regions where the coal industry mines have been closed (MSME Credit Line) andto support the local executive bodies which took on their balance sheets the social infrastruc-ture objects in the regions where the coal mines have been closed (municipal credit line), USD33.7 million were disbursed to finance 35 sub-projects under the MSME credit line and USD 7.2million to realize 26 municipal projects.

In 2008, the National Bank of Ukraine kept on monitoring of servicing debts to the Ministryof Finance of Ukraine executed by the participating banks and the municipal authorities underthe World Bank credit lines. As of 1 January 2009, the indebtedness of banks under the creditlines amounted to USD 4.2 and USD 1.8 million, respectively.

Within the Agreement on lending policy between Ukraine (in person of the Ministry ofFinance of Ukraine) and the World Bank, the National Bank of Ukraine performed the agentservicing of credits, which were assigned by the Ministry of Finance of Ukraine to the banks ofUkraine. According to the Project on the enlarged access to the market of financial services,USD 150 million would be directed through the authorized banks for granting loans to the smalland medium-sized enterprises (SME) in the rural area for 7 year maturity.

In 2008, the National Bank of Ukraine checked the eligibility of 37 credit applications of USD45 million, of which 24 SME sub-projects of USD 23.1 million and 6 applications for refinancingof the micro-credit tranches of USD 17 million granted in the rural area were approved; 7 SMEsub-projects of USD 5.1 million were rejected; together with the participating banks the pack-age of documents on the bank security, acceptable for the Ministry of Finance of Ukraine, wereworked out.

During 2008, the National Bank of Ukraine conducted monitoring of the bank compliancewith the project participation criteria and the bank adherence to the commitments to the Ministryof Finance of Ukraine.

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Annual Repor t 2008

The National Bank of Ukraine kept on maintenance of the project within the World Banktechnical assistance "Reforming of the Financial Sector of Ukraine-II" in order to meet theagreement signed in 2005 as regards the Grant of the Government of the Netherlands TF054948 of Euro 1.5 million.

In 2008, the meetings of the management of the National Bank of Ukraine with Mr. H.Wijffels, Executive Director, and Mr. Shigeo Katsu, Vice-President of the World Bank for Europeand Central Asia, took place concerning the cooperation of Ukraine with the World Bank.

Cooperation with the European Bank for Reconstruction and DevelopmentIn order to support the small and medium-sized business in Ukraine, the second credit line

SME-2 totaling USD 88.2 million that was opened by the European Bank for Reconstruction andDevelopment (hereinafter, EBRD) in 2000, was further implemented.

As of 1 January 2009, within the SME-1 and SME-2 credit lines, the EBRD granted creditsfor 248 projects of USD 218.4 million with maturity of up to 5 years and 2-year beneficial peri-od of LIBOR+8. Micro-credits extended to the final borrowers at the expense of funds re-used,were equal to USD 1.3 billion. In 2008, the SME credits were not rendered by the participatingbanks in view of shortening the maturity period for possible use of funds attracted to 3-4 years,that was attributed to the fact that the SME-2 credit line should terminate in 2010. In the report-ing year, only USD 24 million were extended by the authorized banks to micro-entrepreneurswithin the Program of micro-credits.

The banks went on to increase the micro-credit amounts both at their own fund expenseand at the expense of funds paid by the beneficiaries. As of 1 January 2009, remained out-standing 1940 credits of USD 30.9 million, of which USD 24 million in the current portfolio of theProgram participating banks were formed at the expense of the banks' own funds.

In 2008, the National Bank of Ukraine met in full its liabilities to the EBRD at the regularmaturities, having paid the amount of USD 14.7 million. As of 1 January 2009, the outstandingcredits under the SME-2 amounted to USD 16.1 million. The outstanding debts of the partici-pating banks to the National Bank of Ukraine reduced to the amount of USD 16.5 million.

Within the cooperation framework with the European Bank for Reconstruction andDevelopment, the NBU worked out the Memorandum of Understanding between theGovernment of Ukraine and the EBRD and the Law of Ukraine "On Ratification of theAgreement between the Government of Ukraine and EBRD on the cooperation and activities ofthe EBRD Resident Representative Office in Ukraine".

The Annual Meeting of the EBRD Board of Governors was arranged in Kyiv on May 18-19with participation of the NBU management; during the event Volodymyr Stelmakh, Governor ofthe National Bank of Ukraine, had a meeting with Jean Lemier, the EBRD President. Also therewere other meetings arranged with the EBRD management related to strengthening and broad-ening of the effective cooperation on the operation of the EBRD correspondent accounts beingopened with the authorized banks for granting credits denominated in hryvnia to the residentsand also related to the EBRD participation in the program of banks' recapitalization, etc.

Cooperation with the International Monetary Fund Because of the deep adverse effect of the world financial crisis on the economy of Ukraine,

the basic directions for cooperation of the National Bank of Ukraine and the InternationalMonetary Fund (hereinafter, the IMF) appeared to be the elaboration and realization of the jointStand-by Program according to which the IMF would render the financial support for Ukraineduring next two years in order to promote the stable and long-term growth to be achievedthrough pursuing the economic policy developed. Basic directions of the program were reflect-ed in the Memorandum on the Economic and Financial Policy for 2009-2010 signed on31.10.2008. Within the Stand-by Program, the first tranche of USD 4.6 billion came to Ukrainein November 2008.

The cooperation on providing the technical assistance and advisory support from the IMF

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experts went on. In general, in 2008, the experts of 14 IMF missions worked in the NationalBank of Ukraine, specifically, as regards the following:

– European Department on Article IV of the IMF By-laws (the annual advices/consultationsto be arranged), from 20.03 to 01.04.08; review of the current economic situation in the coun-try; assessment of influence of the world financial crisis on the Ukraine situation and coordina-tion of the terms and parameters of the Stand-by lending program for Ukraine (October 16 to29); assessment of the current economic and financial situation in the country; adhering to theprovisions of the Memorandum on the economic and financial policy within the joint Stand-byProgram (December 1 to 9);

– Financial Department on the assessment of the protective mechanisms of the NationalBank of Ukraine (December 8-17);

– Legal Department on the general review to be conducted and the assessment of meas-ures and legislative acts approved by the National Bank of Ukraine and the Government ofUkraine to arrange and conduct the foreign exchange auctions and the operation of the inter-bank foreign exchange market (December 8-12).

The cooperation with the IMF advanced and its representatives rendered the advisory sup-port to the officers of the National Bank of Ukraine in the issue of external sector statistics,investigation study, re-organization and recapitalization of banks, foreign exchange and mone-tary policies, macro-economics.

By results of the technical missions, the IMF experts provided the Ukrainian party with thereports consisting of the appropriate recommendations used by the NBU officers in their work.

The NBU management took part in the Spring Meeting of the IMF and the World BankGovernors (April 10-14, Washington, USA); annual meetings of the IMF and the World BankConstituency Group Governors headed by the Netherlands and Ukraine (October 9-14,Washington, USA).

Cooperation with the CIS Inter-state BankDuring 2008, the representatives of the National Bank of Ukraine participated in the meet-

ings of the CIS Inter-state Bank Council, tracking the process of its reforming in compliance withthe official position of Ukraine, and also in the elaboration of the draft Strategy for the CIS eco-nomic development.

In order to improve the work with credits and to enhance the quality control and manage-ment of the CIS Inter-state Bank, the Working group consisting of the central (national) banks'experts from the establishing countries, including Ukraine, conducted the inspection of the lend-ing activities of the CIS Inter-state Bank.

Implementation of the German-Ukrainian Fund ProgramIn 2008, the National Bank of Ukraine kept on monitoring of funds of the German-Ukrainian

Fund (GUF) as regards the observance of the "Grant Agreement" signed by the National Bankof Ukraine and the German Reconstruction Credit Institution (KfW).

During 2008, the final borrowers were granted credits within the GUF program by the JSBank "Forum", open JSB "Nadra", open JSB "CrediPromBank" and open JSC "MegaBank". Asof 1 January 2009, 9 credit agreements concluded between the GUF and the participatingbanks of ˆ 17.6 million were acting. As of 1 January 2009, 730 credits amounting to ˆ 10.9 mil-lion remained outstanding. Because of the financial crisis, the credit activities of the participat-ing banks in the IV quarter essentially fell as compared with the previous quarter.

On the whole, as of 1 January 2009, the banks, participating in the GUF Program of micro-credits, extended 160.4 thousand credits of ˆ 672.8 million, including over 1 thousand creditsof ˆ 22.7 million, rendered in 2008. By the end of the year, the current credit portfolio formed0.7 thousand loans of ˆ 10.9 million.

During 2008, the National Bank of Ukraine went on to take measures on the implementa-tion of the "Refinancing Program to Support the Rural Area Credits". According to that project,

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Annual Repor t 2008

the Government of the Federative Republic of Germany extended to Ukraine (in the person ofthe Ministry of Finance under condition that the GUF should be the project executor) the pref-erential credit line of ˆ 7 million for 45-year period. The Project was implemented within theframework of the Inter-government Agreement on the financial cooperation between Ukraineand Germany and the Sub-credit Agreement on the transfer of the loan and the grant to financethe Project signed by the GUF and the Cabinet of Ministers of Ukraine.

In 2008, based upon the due diligence results, the GUF Supervisory Council approvedthree banks to be the project participants: the type open JSB "Dnister", the JSC "Finance &Credit" and the JSB "ImexBank". The GUF approved in full the amount of funds to be deliveredas the first tranche, received by the GUF from KfW (ˆ 3 million), having concluded the Creditagreements with the banks-partners. The GUF credits within the Credit agreements have beenextended to the open JSB "Dnister" and the JSB "ImexBank". Credit funds for the final borrow-ers were granted within the GUF Project only by the open JSB "Dnister"

Cooperation with other international institutionsIn conformity with the strategic course of Ukraine in the external economic activities, in

2008, the National Bank of Ukraine continued to pay an important attention to the cooperationwith the European Union (EU).

In view of the fact that in the reporting year the negotiations on the establishment of the freetrade zone were officially launched between Ukraine and the EU, the National Bank of Ukrainetook active part in preparing the negotiating materials and the position documents, as well asin the elaboration of the draft Agreement on the establishment of the free trade zone, includingthe participation in the very negotiating process. Similar work was conducted as regards theconclusion of the new Agreement on the association between Ukraine and the EU that shouldrenew the general institutional framework of the Ukraine/EU cooperation and promote theenhancement of the relationships in all areas.

The National Bank of Ukraine also participated in the elaboration of the issues related tofinancing of the EU Foreign Assistance Program "Support of the Implementation of the EnergyStrategy of Ukraine".

During the reporting period, the National Bank of Ukraine went on the active participation inthe organizational structures ensuring the cooperation with EU in the different areas:Ukraine/EU Cooperation Committee, its sub-committees, in the Ukraine/EU CooperationCouncil.

During 2008, the National Bank of Ukraine provided realization of the Ukraine-NATO TargetPlan for 2008 in the part, related to the competence of the National Bank of Ukraine.

In 2008, the National Bank of Ukraine participated in the elaboration of measures (on thegeneral government level) on the adaptation of the Ukraine economy to the requirements of theWorld Trade Organization (WTO), which would enable to optimize the integration process to theworld economic environment.

Upon joining Ukraine into the WTO (May 2008) and obtaining the right to participate in theworking groups on the consideration of applications for entering into the WTO , the NationalBank of Ukraine draw proposals as regards the position of Ukraine in the multilateral negotia-tions on the access to the markets of goods and services of other countries.

Joining Ukraine into the WTO also pushed the initiation of talks with other WTO member-countries on the establishment of the free trade zones. In the reporting year, such talks werelaunched with Singapore. In view of the above, the National Bank of Ukraine was involved inthe elaboration of the draft Agreement on the free trade purposed to promote the developmentof the bilateral economic relationships through the extension of the mutual trade.

In conformity with the national Strategy of Cooperation with the International FinancialOrganizations for 2006-2008, further cooperation with the Black-Sea Bank for Trade andDevelopment was in progress. In particular, in 2008, the National Bank of Ukraine participatedin the elaboration of the issue related to increasing Ukraine's participation in the authorized cap-

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ital of the said regional development bank that would contribute to the possibility of attractingthe future long-term financial resources to realize the investment projects in Ukraine.

In 2008, the work went on as regards the intensification of cooperation between theNational Bank of Ukraine and the European Investment Bank, the National Bank of Ukraine andthe Northern Investment Bank and as regards joining the Bank for International Settlements.

2.12. BASIC TRENDS OF ECONOMIC WORK OF THE NATIONALBANK OF UKRAINE

2.12.1. Statistical and information support of the National Bank of Ukraine activity

In 2008, the National Bank of Ukraine ensured handling of economic work directed towardsfulfilling the functions in compliance with the Law of Ukraine "On the National Bank of Ukraine"under the following directions:

– compilation of monetary and banking statistics;– compilation of the balance of payments, its analysis and forecasting;– compilation and analysis of international investment position;– compilation and analysis of the state external debt; – analysis and forecasting of macroeconomic and monetary indicators;– optimization of the statistical reporting that is submitted to the National Bank of Ukraine;– preparation of information as regards extended credits, attracted deposits and invest-

ments into securities;– preparation of information as regards interest rates on deposits and credits;– preparation of statistical publications, analytical reviews and presentation materials as

regards the situation and tendencies of the economy and banking system development; – monitoring of putting into effect the measures on fulfillment of decrees and orders of the

President of Ukraine on economic issues, etc.During the reporting year, compilation of the monetary and banking statistics indicators was

ensured, the statistical reporting was provided to the International Monetary Fund and the infor-mation was disseminated through the official editions of the National Bank of Ukraine and theNBU web-site.

In cooperation with the Secretariat of the President of Ukraine and the Cabinet of Ministersof Ukraine, the National Bank of Ukraine ensured fulfillment of measures related to the develop-ment of the banking system and raising its role in the development of the economy of the state.

In order to ensure transparency concerning the banking activity, the National Bank of Ukraineissued over the year the following official periodicals: analytical and statistical edition "Bulletin ofthe National Bank of Ukraine" and magazine "Herald of the National Bank of Ukraine" on amonthly basis and the "Balance of Payments and External Debt of Ukraine" quarterly.

In 2008, the work on optimization of the statistical reporting, submitted to the National Bankof Ukraine, was continued and contributed to ensuring the compilation of the monetary statis-tics, balance of payments statistics, international investment position, as well as external debtunder international standards, and to fulfillment of regulative and supervisory functions by theNational Bank of Ukraine. During the reporting year, two amendments were made to the Rulesof Organizing the Statistical Reporting submitted to the National Bank of Ukraine and, as aresult, 34 forms were changed, six new forms were introduced and one form of statistical report-ing was cancelled. Proposals as to amendments to the acting forms of statistical reporting, can-cellation of some forms of reporting, changes in the procedure, periodicity and terms of report-ing, as well as software adjustment were coordinated with the working group organized inMarch 2008 with participation of specialists of the Central Office of the National Bank ofUkraine, Association of Ukrainian Banks, "Ukrainian Credit and Banking Union" Association andsome leading banks of Ukraine.

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Annual Repor t 2008

In 2008, the statistical reporting on monetary and banking statistics was monthly presentedto the International Monetary Fund for the indicators inclusion in the statistical digest"International Financial Statistics" and Annual Report of the International Monetary Fund.

Initiated was the development and implementation of the system of statistical data dissem-ination in electronic format, whose underlying principles are data actuality and promptness insubmitting the information to users in accessible and agreeable form. This system correspondsto modern practice of data dissemination in the European System of Central Banks. During2008, on the web-site of the National Bank of Ukraine, there was placed the Statistical Bulletin(electronic edition) with the monetary statistics data in a new format, as well as express publi-cations "Monetary Aggregates Statistics. Analytical Review" and "Statistics of Formation andAllocation of Financial Resources of Depository Corporations".

In order to comply with the IMF's Special Data Dissemination Standard, the work on preparationand dissemination of data and metadata according to the indicators of the financial and external sec-tors of the economy was carried out. Prepared and disseminated were the metadata in the new for-mat including the basic data page, the general methodology page and fundamentals of assessingthe quality of data by the indicators of the financial and the external sectors of the economy.

During the year, on the web-site of the National Bank of Ukraine ensured was the compila-tion and dissemination of quarterly statistical information regarding financial stability indicatorsof the depository corporations sector. Starting from October 2008, initiated was the informationpreparation under a new format of submitting the data and metadata regarding the financial sta-bility indicators to be presented to the International Monetary Fund for publication on the web-site of the International Monetary Fund.

In 2008, the work, aimed at making the financial passport of regions by the indicators ofeconomic development, monetary and banking statistics for the economic analysis of regionsand economic researches, was going on.

During 2008, the work on implementing the World Bank's project "Development of the statestatistics system for monitoring of the social and economic transformations" continued. In thecontext of the above project, teaching English was provided for employees of the National Bankof Ukraine, a full range of procedures was conducted to select an external consultant for provi-sion of services as to improving the methodology of monetary statistics and balance of pay-ments statistics.

Economic work in the NBU regional branches was carried out by the divisions of economicwork and money-and-credit relations and was aimed at a permanent monitoring of relevant region'seconomic development, analysis of the activity of banking institutions, as well as the money andcredit, securities and foreign exchange markets according to their distinguished indicators.

During the reporting year, the work on improving the information content and updating theweb-site of the National Bank of Ukraine continued. Increase in publications of information, ana-lytical and statistical materials such as press releases and official announcements, statisticalpublications and analytical reviews, information on foreign currency auctions, foreign currencysales in the interbank market, banks' liquidity regulation, etc., that attracted more and moreattention of users. This is evidenced by increased number of visitors of the NBU web-site in2008 (by more than 80%).

For the purpose of all-round elucidation of the activity of the National Bank of Ukraine, "TheNational Bank of Ukraine" exhibition continued its work at the "Expocenter of Ukraine" NationalComplex, which represented products of the Banknote Printing and Minting Works of theNational Bank of Ukraine, official publications, booklets with information about training institu-tions of the National Bank of Ukraine, "Development of the Economy and the Banking Systemof Ukraine" presentation materials, materials concerning the development of the NationalSystem of Mass Electronic Payments, as well as samples of electronic (plastic) cards issued inUkraine for making the settlements etc.

For the artistic design of illustrative photos, text and numerical materials, exhibits, video andinformation materials of the exposition, the National Bank of Ukraine in 2008 was awarded adiploma of the "Expocenter of Ukraine" National Complex.

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In 2008, in order to improve the information awareness of the National Bank of Ukraine spe-cialists with consideration for professional needs, provided was the operational support of themanagement and structural units of the National Bank of Ukraine with materials of internation-al financial organizations, particularly the International Monetary Fund, the World Bank, as wellas central banks and leading analytical and rating agencies. During the year, more than 170documents were placed on the bank's intranet special web-site, which covers the activities ofinternational financial organizations.

At the end of the year, the information and analytical bulletin for the management started tobe issued, which publishes the most sensitive announcements of leading foreign experts deal-ing with the problems of the world economy development, assessments, recommendations,forecasts, comments of the official representative of Ukraine in the IMF and other informationneeded for decision-making. In execution of the management requests, when preparing theanalytical and reference notes, the documents of the International Monetary Fund executivedirectors, which the National Bank of Ukraine is authorized to be familiarized with, were used.A special emphasis was placed on the work of experts of the International Monetary Fund andcooperation with the official representative of Ukraine in the International Monetary Fund.

2.12.2. Economic research and forecastingIn 2008, in order to improve the process of preparing the draft decisions and to introduce

the procedures of public policy adapted to European practice, the Policy Analysis Group pre-pared and placed the Green Book "Consultations on Strengthening the NBU Role in Ensuringthe Price Stability" on the web-site of the National Bank of Ukraine, as well as published theWhite Book "The Way of Strengthening the NBU Role in Ensuring the Price Stability".

In the reporting year, the economic research based on a quarterly poll of business expec-tations of Ukrainian enterprises continued. The aim of the polls was to get information regard-ing the mood of economic entities and supplementary data for the macroeconomic forecast.The information was received by the voluntary questioning of 1256 enterprises selected on abasis of regional structure and according to the economic activity types. Analytical materials andpoll results were placed on the Internet web-site of the National Bank of Ukraine and were givento enterprises-participants, as well as state authorities.

In progress was the work on improving the analytical and forecasting system's basic com-ponents, the main of which was the "Quarterly Predictive Model" (QPM) that was used to sim-ulate the influence of monetary policy on the real economy sector and enabled to analyze dif-ferent scenarios of monetary policy for pursuing the stated objectives, in particular regarding theinflation. Forecasting methods used at the National Bank of Ukraine were made public in somepresentations and widely elucidated in a number of scientific articles and publications.

2.13. SCIENTIFIC RESEARCH OF THE NATIONAL BANK OF UKRAINE During 2008, in conditions of worsening of the situation in the world financial markets, the

National Bank of Ukraine carried out a number of scientific researches aimed at the sustain-ability strengthening of the banking system of Ukraine, in particular regarding:

– substantiating the system of factors for forecasting the dynamics of the banking systemstability indicators;

– capital requirements to banks to cover the interest risk in compliance with the Amendmentto Basle 1;

– generalizing the international experience in regulation and assessment of a bank's hybridcapital and prospects of its instruments' introduction;

– methods of the shadow economy calculation and construction of the econometric modelfor valuation of the shadow economy of Ukraine;

– econometric models for the exchange rate policy making and macroeconomic effects ofchanges in the exchange rate dynamics;

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Annual Repor t 2008

– international experience regarding the instruments and approaches to quality control ofbanks' consumer credits.

The work on elaboration of "Financial Sector Development Strategy up to 2015" project wascontinued.

In the reporting year, the National Bank of Ukraine, in the context of international coopera-tion, participated in preparing the "Development of Communicative Policy of the National Bankof Ukraine" project

During the year, the National Bank of Ukraine, with assistance of international financialorganizations, interested ministries, departments and associations, organized scientific confer-ences, seminars, round-tables with discussion of problem issues of scientific research, propos-als and practical recommendations as to the directions of developing the banking system com-petitiveness.

2.14. IMPROVEMENT OF ACCOUNTING AND FINANCIAL REPORTINGDuring 2008, the National Bank of Ukraine directed its activity towards improvement of the

methodological tools in order to give to the users the complete, true and impartial informationabout the financial situation of the Ukrainian banks in compliance with the requirements of inter-national standards of financial reporting.

In accordance with the aims and lines of the banking system development for 2008, thework of the National Bank of Ukraine was directed towards:

– continuation of improving the accounting operations with financial and payment instru-ments, drawing up of reliable and transparent financial reports by Ukrainian banks taking intoaccount the requirements of the international standards of financial reporting;

– harmonization of methodological grounds of accounting with basic legal norms of theEuropean Union.

The above tasks were fulfilled by means of improving the acting normative and legal acts,namely:

– improved were the methodological grounds of representation in the banks' accounting ofthe operations with the use of payment cards through the self-servicing hardware and softwarecomplexes;

– improved were the rules of use of accounting of the banks' operations with cash and bank-ing metals in the part of using the self-servicing hardware and software complexes during theacceptance and subsequent transfer of cash, loan repayment by a borrower, etc.

During 2008, the National Bank of Ukraine worked with banks as to applying the require-ments of international standards for representation in accounting of credits, deposits and finan-cial guarantees, as well as to raising the requirements to disclosure in the financial reporting ofinformation about financial instruments, character and level of risks emerging in operationstherewith. The new approach will ensure getting of the reliable, complete and unbiased infor-mation about the financial situation of a bank and results of its activity and will base on the dataof internal management reporting submitted to the bank top management in order to makeproper decisions.

2.15. AUDIT OF THE NATIONAL BANK OF UKRAINE In 2008, the audit of the National Bank of Ukraine structural units was carried out in com-

pliance with the approved plan of auditing the structural units of the National Bank of Ukraine.When carrying out the audit, the main attention was paid to authenticity of the financial and

statistical reporting, estimation of risks in the activity of structural units of the National Bank ofUkraine, observance of the requirements of the Ukrainian Law and normative and legal acts ofthe National Bank of Ukraine, evaluation of efficiency of the system of internal control of theNBU structural units, as well as improvement of auditing forms and methods.

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The work continued aimed at attaining the conformity of the Audit Department activity withthe International Standard of Professional Activity and Internal Audit developed by the Instituteof Internal Auditors.

In 2008, the audit plan was fulfilled, according to which 289 audits were conducted on differentissues, among them 263 audits of regional branches (25 complex audits and 238 audits on sepa-rate issues of the activity), 10 audits on separate issues of the activity of structural units of the cen-tral office and 16 audits of activity of the structural units and divisions of the National Bank of Ukraine.

By the audits' results, structural units of the National Bank of Ukraine accepted for execu-tion 1728 recommendations, or 95.1% of the submitted ones.

2.16. BANKNOTE AND COIN PRODUCTION2.16.1. Activities of the Banknote Printing and Minting Works

of the National Bank of Ukraine Production activity of the Banknote Printing and Minting Works of the National Bank of

Ukraine in the year under review was carried out in compliance with the established productioncapacities and the tasks of the National Bank of Ukraine regarding the manufacture of moneyand concluded agreements with other customers.

Within the established tasks and concluded agreements the Banknote Printing and MintingWorks in 2008 produced:

– 1.5 billion pieces of banknotes of different denominations;– 1 billion pieces of small coins;– 1 billion pieces of commemorative coins; – 70 million pieces of banknotes to the order of "Giesecke & Devrient GmbH" (Germany);– 30 thousand state awards, departmental medals and badges.Production volume in 2008, compared to 2007, increased by 26.8% and amounted to UAH

434.6 million.Increase in output of products of the Banknote Factory in terms of value was caused by

both the cost increase and growth of the banknote production volume under the order of theNational Bank of Ukraine (by 104.7 million banknotes, or by 6.9%).

Volumes of the Mint output increased in terms of cost in consequence of the cost growth ofproduction of commemorative, jubilee and small coins, mainly due to the increase in cost ofblanks and the augmentation of production volumes of commemorative coins (by 134.4 thou-sand pieces, or by 12.9%) and small coins to order of the National Bank of Ukraine (by 80.0 mil-lion pieces, or by 8.0%).

In 2008, the Banknote Printing and Minting Works of the National Bank of Ukraine realizedproducts (services) to the total amount of UAH 427.6 million, including:

– to the order of the National Bank of Ukraine – UAH 406.2 million;– to the order of governmental institutions and other organizations – UAH 18.0 million.By Decision of the Board of the National Bank of Ukraine of July 1, 2008, No.197, approved

were the Measures on replacement of worn-out equipment and introduction of modern tech-nologies at the Banknote Printing and Minting Works of the National Bank of Ukraine. TheInvestment Program of the Banknote Printing and Minting Works of the National Bank ofUkraine for 2008-2011 was adopted (Decision of the Board of the National Bank of Ukraine ofAugust 6, 2008, No. 233). In compliance with these decisions, concluded were the agreementson updating the Super Numerota-212 machines, on supply of the BPS-2000 quality control sys-tems and "GRABENER" coining presses.

Complex automation of financial and economic processes of the Banknote Printing andMinting Works, as part of the corporative project of automation of the National Bank of Ukraineon the SAP basis, was anticipated as one of the strategic lines of automation of the BanknotePrinting and Minting Works' intra-business activity.

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Annual Repor t 2008

2.16.2. The Banknote Paper Mill activity In 2008, according to the production activity results, the Banknote Paper Mill of the National

Bank of Ukraine produced 1704 tons of banknote and 383 tons of secured paper that enabledto load production facilities by 81.1% and 18.2%, respectively.

Volume of sales in 2008 was 1725 tons of banknote paper to the amount of UAH 72.9 mil-lion, and 410 tons of secured paper to the amount of UAH 7.3 million.

The order of the National Bank of Ukraine was executed in full and in due time. For execution of the government energy saving program, the section of electricity and

process steam production was put into operation.According to the plan tasks of manufacture technical re-equipment, the complex computer-

aided security system of the Banknote Paper Mill was put into operation. With the purpose of paper production for a new generation of banknotes, the modernization

of automated control system of technological processes of paper production started.In 2008, due to introduction of the technology of mechanically made watermark print pro-

duction, the term for production of a special pattern of a new design decreased by 50.0%.In execution of production quality improvements, a small-diameter forming roll was

installed, owing to which the output increased by 3.0% as long as large denomination banknotepaper is produced.

Refined was the composition of banknote paper with the use of cheaper cotton raw mate-rial for production of banknote paper with improved consumer properties.

In order to improve paper durability of banknotes in the process of their circulation, workedout were practical recommendations as to the use of flaxen bast-fibers for banknote manufac-ture. Research and industrial samples of banknote paper were made involving flax fibers.Examined were technical and printing characteristics of the paper during manufacturing themonetary units at the Banknote Factory of the National Bank of Ukraine and positive resultswere obtained.

2.17. STAFFING AND PERSONNEL TRAINING AND RETRAINING As at January 1, 2009, the personnel of the National Bank of Ukraine numbered 11314 per-

sons, including 6226 civil servants and 5088 other employees (see Table 30).

Table 30. BREAKDOWN OF CIVIL SERVANTS OF THE NATIONAL BANK OF UKRAINE BY POSITION CATEGORIES

(as of December 31, 2008 )Indicators Total persons Men Women

Number 6226 2404 3822Senior officialswhereof: 1745 853 8921st category 5 5 02nd category 121 85 363rd category 567 228 3394th category 1034 517 5175th category 18 18 0Professionals, specialists, employees 4481 1551 2930whereof:2nd category 6 4 23rd category 447 124 3234th category 417 118 2995th category 3611 1305 2306

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The qualitative composition of the personnel of the National Bank of Ukraine's system overtwo last years was as follows (see Table 31).

Table 31. QUALITATIVE COMPOSITION OF THE NATIONAL BANK OF UKRAINE PERSONNEL

Personnel Qualitative Indicators 2008 For reference: 2007

Specialists (senior officials, professionals, specialists) with complete higher education (number of persons) 6645 6451Doctors and Candidates of Sciences (number of persons) 385 368Specialists with work experience (%): up to 5 years 19.1 19.65 years and more 80.9 80.4Staffing level (%): in the National Bank of Ukraine 96.7 96.5in the Central Office 92.5 94.0Average age of employees:in the National Bank of Ukraine 42.6 41.8in the Central Office 39.9 40.2Employees of retirement age (number of persons) 600 485Dismissed (%) 7.1 7.3Resigned by choice (%) 3.8 4.2

For upgrading the qualifications of employees of the system of the National Bank of Ukraineand banking and financial institutions of Ukraine over 2008, in 1428 training events (seminars,conferences, courses, round tables, probation etc.), 1202 of them were held in Ukraine and 226abroad, 10906 students participated, including 7097 employees of the system of the NationalBank of Ukraine and 3809 persons from banking and other institutions of Ukraine.

The total number of employees of the system of the National Bank of Ukraine who raisedtheir qualification in the reporting year exceeded 3.6 thousand persons (32.2 % of total numberof employees).

High emphasis in personnel training was placed on the issues of information technologies,monetary policy, monetary and banking statistics, balance of payments, macroeconomic fore-casting, banking supervision, financial monitoring, foreign exchange regulation, cash circula-tion, accounting and financial reporting, personnel management, audit, payment systems, legalsupport of banks' activities, banking security, public purchases, other important aspects of theactivity of the central bank and the banking system as a whole (see Figure 60).

Fugure 60. Structure of the training events topics in 2008 in Ukraine and abroad

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Annual Repor t 2008

As at January 1, 2009, 7149 persons studied at subordinated educational institutions underall directions and specialties, including 4207 full-time and 2942 external students. At theexpense of the National Bank of Ukraine budget, 1935 persons studied (including 1798 full-timestudents and 137 NBU employees as external students).

In 2008, 1556 specialists graduated from higher educational institutions of the NationalBank of Ukraine, including 697 full-time and 859 external students.

The stock of the Central Library of the National Bank of Ukraine had 105989 publishedpieces, including 45548 books, 31743 newspapers, 23837 magazines and 4861 other items.The Library has 1896 registered readers. Number of visits equaled 14194.

2.18. DEVELOPMENT OF THE MATERIAL AND TECHNICAL BASEACCORDING TO MAIN DIRECTIONS

The capital investment plan for 2008 stipulated UAH 210.2 million for construction of the NBUown facilities and their financing, including UAH 204.6 million at the expense of centralized fundsand UAH 5.6 million at the cost of own amortization allowances. Actual fulfillment of the capitalinvestment plan amounted to UAH 208.7 million, or 99.3%. At the expense of centralized funds,UAH 203.5 million were spent for design and survey, construction and installation, start-up andother works, as well as for the equipment mounting, that accounted for 99.5% of the capital invest-ment plan at the expense of centralized funds. These were sites of regional branches, education-al institutions, the Central Office and the Banknote Paper Mill. The capital investment plan at theexpense of own amortization was fulfilled to the amount of UAH 5.2 million, or 92.9% under thesites of the Banknote Printing and Minting Works and the Banknote Paper Mill (see Table 32).

A high level of capital investment plan fulfillment was under the sites of educational institu-tions and establishments (by 106.1%) financed at the expense of centralized funds and at theBanknote Paper Mill (by 175.0%) financed at the expense of own amortization.

The capital investment plan at the expense of centralized funds was fulfilled under the sitesof the Central Office by 96.2%, and under sites of regional branches by 89.3%.

Basic assets were put into operation to the amount of UAH 172.4 million, that totaled 96.5%of the plan, including UAH 167.3 million, or 96.8% at the expense of centralized funds and UAH5.1 million, or 86.4% at the expense of own depreciation charges.

The plan of putting into operation the sites at the expense of centralized funds was fulfilledby the Central Office (by 100.8%) and at the expense of its own depreciation charges by theBanknote Paper Mill (by 100.0%).

The plan of putting into operation the sites at the expense of centralized funds was not ful-filled by regional branches (by 97.1%), educational institutions and establishments (by 94.9%)and the Banknote Printing and Minting Works (with UAH 0.8 million planned).

In 2008, the design and survey works were fulfilled to the amount of UAH 6.8 million. At theend of 2008, volumes of non-fulfilled construction amounted to UAH 156.3 million.

Energy saving innovative technologies were introduced at the following fixed assets put inoperation:

– power module to supply the Banknote Paper Mill with electricity and process steam –complex generation of electric and thermal power (cogeneration) for process needs of theBanknote Paper Mill, which allowed to enhance considerably the reliability of power supply andto cut the natural gas consumption almost by 30%;

– use of solar energy for premises heating and hot water supply as a result of reconstruc-tion of the recreation center "Pivdenni Zori" in the village of Zatoka, Odesa Region;

– use of a modern ventilated fa?ade construction for fa?ade warmth-keeping of the admin-istrative building, as a result of which power consumption for heating and air conditioningdecreased by 33%.

Adopted was construction of the 13th category antiburglar vault at the KhmelnytskyiRegional Branch of the National Bank of Ukraine according to the Program of staged bringing

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of cash operating units and vaults of the National Bank of Ukraine institutions into conformitywith acting requirements for the technological reinforcement.

Table 32. CAPITAL CONSTRUCTION WORKS BY SITES OF THE NATIONAL BANK OF UKRAINE IN 2008

(UAH million)Fulfillment,

No. Indicators Plan Fact %

1. Capital investments under the construction sites of the National Bank of Ukraine 210.2 208.7 99.3

1.1 at the expense of centralized funds including: 204.6 203.5 99.5

1.1.1 sites of the Central Office 13.0 12.5 96.21.1.2 sites of regional branches 73.2 65.4 89.31.1.3 sites of training institutions

and organizations 118.4 125.6 106.11.2 at the expense of own amortization

including: 5.6 5.2 92.91.2.1 Banknote Printing and Minting Works 2.8 0.3 10.71.2.2 Banknote Paper Mill 2.8 4.9 175.02. Sites put into operation to the amount

of basic assets 178.7 172.4 96.52.1 at the expense of centralized funds

including: 172.8 167.3 96.82.1.1 of the Central Office 24.5 24.7 100.82.1.2 of regional branches 83.5 81.1 97.12.1.3 of training institutions

and organizations 64.8 61.5 94.92.2 at the expense of own depreciation

including: 5.9 5.1 86.42.2.1 Banknote Printing and Minting Works 0.8 0 õ2.2.2 Banknote Paper Mill 5.1 5.1 100.03 Uncompleted construction of the sites

of the National Bank of Ukraine õ 156.3 õ

2.19. RESULTS OF THE FINANCIAL ACTIVITIES OF THE NATIONALBANK OF UKRAINE

In the income statement of the National Bank of Ukraine for 2008, income and expensesare represented on the accrual basis.

The total income of the National Bank of Ukraine in 2008 as compared to 2007 increasedby 60.4%, or by UAH 4636 million and amounted to UAH 12307 million.

In 2008, the income growth took place primarily due to the increase in income on opera-tions with debt securities that are accounted at fair value with recognition of the revaluationresult in financial results. Within the general structure of income of the National Bank of Ukrainethe share of this item augmented up to 52.1% from 47.2% in 2007 (see Figure 61).

Changes took place in the structure of interest income, whose share in the income of theNational Bank of Ukraine for 2008 was 41.8% (47.5% in 2007): income under the extendedcredits equaled 28.4%, whereas in 2007 it was 3.2% only; the share of income on the placeddeposits decreased up to 68.6% from 97.7% in 2007.

Total volume of current expenditures of the National Bank of Ukraine in 2008 as comparedwith 2007 increased by 45.4%, or by UAH 924.0 million, and amounted to UAH 2960 million.

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Annual Repor t 2008

Figure 61. Structure of income of the National Bank of Ukraine for 2004–2008

In 2008, the structure of expenditures of the National Bank of Ukraine did not change essen-tially, except commission expenditures whose share in the reporting year grew up to 4.6% from0.2% in 2007. This item growth (by UAH 129 million) took place as a result of commission pay-ment for servicing the first IMF tranche within the credit line, as well as expenditures for creationof provisions for devaluation of the National Bank of Ukraine foreign exchange assets (by UAH145 million). In addition, during 2008, expenditures caused by manufacture of commemorativeand jubilee coins, souvenir and other products increased (by UAH 84 million) due to increase intheir variety and production costs, as well as amortization (by UAH 75 million). However, theshare of these expenses in bulk decreased by 3.9 percentage points (see Figure 62).

Figure. 62. Structure of expenses of the National Bank of Ukraine for 2004–2008

Profit from day-to-day activity of the National Bank of Ukraine for 2008 increased by 66.0%,or by UAH 3712 million and amounted to UAH 9347 million.

Governor

of the National Bank of Ukraine

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V.S. Stelmakh

Part 3

CALENDAR OF BASIC EVENTSHELD IN 2008

CALENDAR OF BASIC EVENTS HELD IN 2008

January Increasing the discount rate from 8.0% to 10.0% annually.

Introducing the registration of agreements on obtaining short-term credits byauthorized banks from non-residents.

Putting into circulation of the commemorative coin "The Year of the Rat" atthe face value of UAH 5 (silver).

Approving the amendments to the Regulations on Handling by the NationalBank of Ukraine of Liquidity of the Banks of Ukraine.

Putting into circulation of the jubilee coin "Vasyl Stus" at the face value ofUAH 2 (German silver).

Approving the amendments to the Regulations on Taking the EnforcementMeasures by the National Bank of Ukraine for Banking Law Violation.

Putting into circulation of the jubilee coin "Leo Landau" at the face value ofUAH 2 (German silver).

February Approving the amendments to the Instruction on the Order of Regulation ofUkrainian Banks' Activity.

Putting into circulation of the commemorative coin "Scythian Gold" (TheGoddess Api) at the face value of UAH 2 (gold).

Putting into circulation of the jubilee coin "Sydir Holubovych" at the face valueof UAH 2 (German silver).

March Putting into circulation of the commemorative coin "Annunciation" at the facevalue of UAH 5 (German silver) and UAH 10 (silver).

April Approving the amendments to the Regulation on the Procedure of Formingthe Required Reserves by Banks of Ukraine.


Putting into circulation of the jubilee coin "100 Years to Kyiv Zoo" at the facevalue of UAH 2 (German silver).

Increasing the discount rate from 10.0% to 12.0% annually.

May Putting into circulation of the jubilee coin "600 Years of the City of Chernivtsi"at the face value of UAH 5 (German silver).

Putting into circulation of the jubilee coin "Yevhen Petrushevych" at the facevalue of UAH 2 (German silver).

Putting into circulation of the commemorative coin "Black Griffin" at the facevalue of UAH 10 (silver) and UAH 2 (German silver).

Putting into circulation of the commemorative coin "Swallow's Nest" at theface value of UAH 50 (gold) and UAH 10 (silver).

Putting into circulation of the jubilee coin "225 Years of the City ofSevastopol" at the face value of UAH 10 (silver).

June Approving the amendments to the Regulation on Carrying Out theOperations with Banking Metals by Authorized Banks.

Approving the Rules of Provisioning under Attracted Deposits and Credits(Loans) in Foreign Currency by an Authorized Bank from Non-Residents.

Putting into circulation of the commemorative coin "Cancer" at the face valueof UAH 2 (gold) and UAH 5 (silver).

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Annual Repor t 2008

Putting into circulation of the jubilee coin "Roman Shukhevych" at the facevalue of UAH 5 (silver).

Putting into circulation of the jubilee coin "850th Anniversary of Sniatyn" atthe face value of UAH 5 (German silver).

Approving the Regulations on the Procedure of Ensuring Inspections byGovernment Control Authorities and External Auditors within the System of theNational Bank of Ukraine.

Approving the Regulation on the Distinctions of a Bank's Reorganization bythe Decision of Its Owners.

Approving the amendments to the Instruction on Inter-Bank Transfer in theNational Currency in Ukraine.

Approving the amendments to the Regulations on the Procedure ofRegistration of Agreements of Membership or Participation in InternationalPayment Systems and Adjustment of Rules of Money Transfer SystemsCreated by Resident Banks.

Approving the Regulations on Electronic Money in Ukraine.

Approving the amendments to the Rules of Statistical Reporting to beSubmitted to the National Bank of Ukraine.

July Putting into circulation of the commemorative coin "Christianization of KyivRus" at the face value of UAH 100 (silver).

Putting into circulation of the commemorative coin "Leo" at the face value ofUAH 5 (silver) and UAH 2 (gold).

Putting into circulation of the commemorative coin "Tereschenko Family" atthe face value of UAH 10 (silver).

Approving the Regulations on the Procedure of Execution by Banks ofDocuments for Transfer, Forced Writing Off and Sequestration of ForeignExchange Amounts and Banking Metals.

Approving the amendments to the Instruction on the Procedure of Issuing theIndividual Licenses to Invest Abroad.

Introducing the 20% reserve requirement for short-term bank FX loans.

Putting into circulation of the jubilee coin "Heorhii Voronyi" at the face valueof UAH 2 (German silver).

August Approving the amendments to the Instruction on the Procedure of Regulationof Banks' Activity in Ukraine.

Approving the amendments to the Regulation on the Procedure of Creationand State Registration of Banks and Opening of their Branches,Representative Offices and Departments.

Approving the amendments to the Regulation on the Procedure of Issue toBanks of Banking Licenses, Written Permits and Licenses to Perform IndividualTransactions.

Putting into circulation of the commemorative coin "Virgo" at the face valueof UAH 5 (silver) and UAH 2 (gold).

September Putting into circulation of the commemorative coin "Christianization of KyivRus" at the face value of UAH 5 (German silver).

Accepting the Methodical recommendations on planning the measures inUkrainian banks in case of unforeseen circumstances.

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Calendar o f Events

Putting into circulation of the jubilee coin "Nataliia Uzhvii" at the face value ofUAH 2 (German silver).

into circulation of the jubilee coin "175 Years of the State Arboretum"Trostianets" at the face value of UAH 5 (German silver).

Approving the amendments to the Instruction on the Organization ofTransportation of Foreign Exchange Valuables and Collection Activity inBanking Institutions of Ukraine.

Putting into circulation of the commemorative coin "Libra" at the face value ofUAH 5 (silver) and UAH 2 (gold).

Putting into circulation of the jubilee coin "725th Anniversary of City of Rivne"at the face value of UAH 5 (German silver).

Putting into circulation of the commemorative coin "On the Way to theIndependence. Ukrainian-Swedish Politico-Military Alliances of the 17th -18thCenturies" at the face value of UAH 10 (silver).

October Approving the amendments to the Instruction on the Procedure of Regulationof Banks' Activity in Ukraine.

Putting into circulation of the commemorative coin "In Honor of EcumenicalPatriarch Bartholomew I Visit to Ukraine" at the face value of UAH 50 (silver).

Putting into circulation of the commemorative coin "Decennial of Entry of theHistorical Center of the City of Lviv in the UNESCO World Heritage List" at theface value of UAH 10 (silver).

Introducing the moratorium on the pre-schedule withdrawal of deposits bydepositors and on the credit portfolio growth.

Approving the Instruction on the Preparation and Publication of FinancialReporting of the National Bank of Ukraine.

Approving the amendments to the Regulation on the Procedure andConditions of Foreign Exchange Trade.

Increasing the amount of reimbursement under deposits to individuals by theIndividuals Deposit Insurance Fund in case of bankruptcy from UAH 50 thou-sand to 150 thousand.

Introducing the 11% annual limitation at the most as to the boundary cost ofexternal borrowings of residents in foreign currencies of the 1st group of theClassifier of foreign currencies and banking metals for short-term credits.

November Introducing the mechanism of accounting the open balance FX positions ofthe bank for each individual currency under FX purchase-sale operations.

Putting into circulation of the jubilee coin "90th Anniversary of Establishment ofthe West Ukrainian People's Republic" at the face value of UAH 2 (German silver).

Putting into circulation of the commemorative coin "Millennium of Mintage inKyiv" at the face value of UAH 20 (silver).

Putting into circulation of the commemorative coin "Hlukhiv" at the face valueof UAH 10 (silver).

Approving the Instruction on the Arrangement of Issuing and Cash Work with-in the System of the National Bank of Ukraine.

Putting into circulation of the jubilee coin "Hryhorii Kvitka-Osnovianenko" atthe face value of UAH 2 (German silver).

December Approving the amendments to the Regulation on the Procedure of Creationand Use of Provisions for Recovery of Possible Losses under CreditOperations of Banks.

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Annual Repor t 2008

Introducing the temporary ban on FX purchase and exchange in settlementsfor import of products and services.

Introducing the temporary permit for foreign exchange purchase at the inter-bank foreign exchange market on the instruction of natural persons in order totransfer outside Ukraine under current foreign exchange noncommercial oper-ations the amounts not exceeding in the equivalent UAH 75000 per month.

Introducing the temporary zero rate of provisioning under agreements onattraction by banks of foreign currency from non-residents for the period of 183calendar days or less.

Approving the Special Procedure of Taking the Measures as to FinancialRecovery of Banks.

Putting into circulation of the jubilee coin "140 Years of Taras Shevchenko All-Ukrainian "Prosvita" Society" at the face value of UAH 5 (bimetallic coin of basemetals).

Putting into circulation of the jubilee coin "975 Years of the City of Bohuslav"at the face value of UAH 5 (German silver).

Approving the amendments to the Rules of Statistical Reporting to beSubmitted to the National Bank of Ukraine.

Approving the amendments to the Instruction on the Procedure ofPreparation and Publication of Financial Reporting of Ukrainian Banks.

Putting into circulation of the jubilee coin "Vasyl Symonenko" at the facevalue of UAH 2 (German silver).

Approving the Temporary Regulations on Extension of Credits by theNational Bank of Ukraine to Support Bank Liquidity in Case of a Real Threat tothe Banking System Stability.

Approving the Temporary Procedure of Interaction of the Structural Units ofthe National Bank of Ukraine as to Strengthening the Banks' Liquidity byExtension of Credits.

Approving the Regulations on Creation and Activity of the Committee of theNational Bank of Ukraine on Determining the Current and ProspectiveSolvency of Banks and Their Vitality Amid the Crisis.

Introducing the temporary procedure of functioning of the non-cash inter-bank foreign exchange market in Ukraine.

Putting into circulation of the jubilee coin "Church Complex in the Village ofBuky" at the face value of UAH 10 (silver).

Putting into circulation of the jubilee coin "Maria Prymachenko" at the facevalue of UAH 5 (silver).

Accepting the Procedure of Provisioning under Formed Reserves on CreditOperations in Foreign Currency with Borrowers Having no Sources of ForeignCurrency Earnings.

Approving the Regulations on Holding of Foreign Currency Auctions by theNational Bank of Ukraine.


Approving the amendments to the Regulations on the Procedure of Creationand State Registration of Banks, Opening of Their Branches, RepresentativeOffices and Departments.

117

Calendar o f Events

Part 4

METHODOLOGICAL COMMENTSTO THE ANNUAL REPORT

Gross Domestic Product (GDP) means an indicator featuring the final result of the pro-duction activity of manufacturers – residents during the reporting year. It is defined as a sum ofgross values added, that have been created as the result of economic activity and taxes ongoods less subsidies for goods.

Nominal GDP is the GDP volume represented in current (actual) prices.Real GDP is the GDP volume measured in prices of the period taken as a comparative

base.Foreign exchange position of a bank is a ratio (difference) of a bank's claims and liabili-

ties in foreign currency and banking metals.Open foreign exchange position is an imbalance between claims and liabilities of a bank

in foreign currency. The open position is short if the volume of liabilities on the currency andbanking metals sold exceeds that of the claims, and it is long if the volume of claims for the pur-chased currency and banking metals exceeds that of the liabilities. The open foreign exchangeposition is associated with an additional risk in case of change of the exchange rate.

Percent of cash concentration in circulation is a portion of emission result (excess of theissue of cash from the cashier's desks over its incomings) in the issues of cash from thecashier's desks.

Monetary base is the sum total of liabilities of the National Bank of Ukraine in the nationalcurrency that ensure growth of the money supply and crediting of the economy. Its regulation isgoing on due to the conduct by the National Bank of Ukraine of operations with governmentsecurities, operations in the foreign exchange market and refinancing of banks. The monetarybase growth is subject to control with the aim of preventing the spontaneous enlargement ofmoney in circulation and the inflationary pressure.

Monetary base is an indicator of the financing base that is the basis for forming the mone-tary aggregates but it is not a monetary aggregate itself. Monetary base includes the curren-cy issued into circulation by the National Bank of Ukraine, as well as the transferable depositsin national currency with the National Bank of Ukraine. Currency in circulation comprises ban-knotes and coins issued by the National Bank of Ukraine except banknotes and coins held inthe vaults of the National Bank of Ukraine, cashier's desks and ATMs of the institutions of theNational Bank of Ukraine. Transferable deposits include liabilities of the National Bank ofUkraine under the funds on the correspondent accounts, funds of required reserves and otherfunds on demand of other depository corporations (banks), as well as funds on the accounts ofthe state non-financial corporations and households (employees of the National Bank ofUkraine) in national currency with the National Bank of Ukraine.

Monetary aggregates comprise liabilities of other depository corporations and the NationalBank of Ukraine to other sectors of the economy, except the sector of general government andother depository corporations. Components of monetary aggregates are financial assets in theform of national currency in cash, transferable deposits, other deposits, funds on securitiesother than shares that are issued by other depository corporations and belong, on the owner-ship right, to other financial corporations, non-financial corporations, households and nonprofitinstitutions serving households. Depending on the liquidity reduction level, financial assets aregrouped into different monetary aggregates Ì0, Ì1, Ì2 òà Ì3.

Monetary aggregate Ì0 comprises currency in circulation outside the other depository cor-porations.

Monetary aggregate Ì1 includes monetary aggregate Ì0 and transferable deposits innational currency.

Monetary aggregate Ì2 comprises monetary aggregate Ì1 and transferable deposits inforeign currency and other deposits.

Monetary aggregate Ì3 (money supply) comprises monetary aggregate Ì2 and securitiesother than shares.

Transferable deposits include the funds that are exchangeable on short notice to cash attheir nominal values and directly used to make payments.

Other deposits include non-transferable deposits that are exchangeable on short notice tocash or transferable funds, namely, the funds on demand that are not used directly to make pay-ments, time funds and savings deposits.

Devaluation means the decrease in the exchange rate of the national currency against for-eign currencies.

120

Annual Repor t 2008

Deposits are the funds, in cash or non-cash forms, in the currency of Ukraine, or in foreigncurrency, placed by customers on their personal accounts on an agreement basis for a fixedterm of storage, or without indication of such a term and be repaid to the depositor in accor-dance with the law of Ukraine and the agreement terms.

Budget deficit is an excess of budget expenditures over its revenues.Households are hired employees, employers, self-engaged workers, pension receivers,

receivers of income from property and other transfers.Acquiring means activity related to the technological, informational servicing of traders and

settlements with them on the operations performed with the use of special means of payment.Effective exchange rate – Nominal (NEER) is an index of the average-weighted change

in the exchange rate of national currency versus the currency basket of the countries – maintrade partners. For its calculation used are the weighting coefficients that reflect the averageshare of countries – main trade partners of Ukraine for the last three years in its total externalturnover of goods.

Effective exchange rate – Real (REER) is a nominal effective exchange rate adjusted tothe change in the price level or other indicators of production expenses that reflects the dynam-ics of the real exchange rate of a certain country versus currencies of the countries – main tradepartners.

Index of the real effective exchange rate of hryvnia reflects the change of price compatibil-ity of national goods with regard to their analogues, produced in the countries – main trade part-ners.

Consolidated budget of Ukraine includes indicators of the state budget of Ukraine, thebudget of the Autonomous Republic of the Crimea and local consolidated budgets of regionsand the cities of Kyiv and Sevastopol.

Change year on year is 12-month interest rate change at for the reporting month that iscalculated by the formula:

, where Lt – balances by the end of month t.

GDP index-deflator is the ratio of the GDP in actual prices of the reporting period to thatin constant prices.

Consumer price index (CPI) characterizes variations of the overall level of prices and tar-iffs for the goods and services purchased by households for the nonproductive consumption.

Base consumer price index (BCPI) characterizes the inflation caused by the pressure onthe part of demand, i.e. reflects the effects of the change in real monetary conditions, fiscal pol-icy, as well as unforeseen demand shocks. However, under significant supply shocks, the BCPIestimates may be somewhat offset due to the secondary effects whose contribution cannot beremoved by statistical methods.

The main purpose of the BCPI calculation is to determine a stable dynamics of prices withminimization of short-term erratic price changes caused by supply shocks, seasonal factors,administrative regulation of tariffs and prices. Therefore, when calculating the BCPI, changes inprices of foods with a high level of industrial processing, non-foods except fuel, as well as serv-ices administratively non-regulated are taken into account.

The BCPI is a sub-index of the consumer price index (CPI), since its design is based on theavailable methodological principles with regard to the CPI calculation.

Narrow base inflation index is the index of prices of non-foods, except fuel.Broad base inflation index is the CPI, except price indices of fuel, administratively regu-

lated services and foods with a low level of industrial processing.Index of non-base inflation is the index of prices for raw materials, services administra-

tively regulated, and fuel. The weighted amount of broad base inflation and non-base inflationequals the consumer inflation.

Industrial producer price index reflects the price changes in the industrial production.

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Tables

100111

0 1

×⎥⎥⎥

⎦

⎤

⎢⎢⎢

⎣

⎡−

⎟⎟⎟

⎠

⎞

⎜⎜⎜

⎝

⎛= ∏

= −−

−

i it

itt L

La

Foreign currency means foreign money signs in the form of banknotes that are in circula-tion and are a legal tender in the territory of a respective foreign country, as well as those with-drawn from circulation, or those that are withdrawn from it but are subject to be exchanged forthe money signs being in circulation.

Credit emission is an excess of the means of payment issued by the National Bank ofUkraine over those withdrawn from circulation.

Liquidity of a bank is a bank's ability to ensure timely fulfillment of its money liabilities thatis determined by the balance between the terms and amounts of repayment of the allocatedassets and the terms and amounts of a bank's liabilities fulfillment, as well as the terms andamounts of other sources and directions of using the funds (credits extension, other expendi-tures).

A bank's liquidity (instant) is an economic indicator of a bank's activity that is determinedas a ratio of the funds at the cashier's desk and on the correspondent accounts of the bank tothe bank's liabilities accounted on the current accounts.

A bank's liquidity (current) is an economic indicator of a bank's activity that is determinedas a ratio of the primary and secondary liquidity assets to the bank's liabilities with certain ful-fillment terms.

A bank's liquidity (short-term) is an economic indicator of a bank's activity that is deter-mined as a ratio of the liquid assets to the short-term liabilities.

Liquidity (international) is a country's ability to fulfill its international liabilities, to repay debts.Models for servicing a bank's consolidated correspondent account in the SEP are the

models enabling a bank to unite its funds on the consolidated correspondent account in orderto use them effectively.

Model 3 allows for the availability with a bank of the consolidated correspondent and tech-nical accounts and its own intrabank interbranch payment system (further – IIPS) to effect trans-fers between branches and interbank transfers. Thus, branches make transfers by the IIPSmeans through the bank with reflecting the settlement results on the bank's technical account.

The work of banks with Models 4, 7 and 8 does not imply the use of the IIPS. Model 4 allows availability of a bank's consolidated and technical accounts, and branches'

technical accounts. The bank and its branches perform transfers through the SEP independ-ently of one another, but the bank has opportunity during the operational day to set the limits oftechnical accounts and of initial turnovers for the branches and to get from the SEP the result-ing technological information about their work.

Model 7 is a variation of Model 4 that differs from it by the fact that the bank is enabled toperform initial payments on behalf of branches, as well as to limit authorities of branches withregard to fulfillment of the settlement operations.

Model 8 is distinguished from Model 4 by the fact that the bank may get information aboutthe work of branches during the banking day in the real time mode.

Nonfinancial corporations are corporations engaged primarily in the production of marketgoods or nonfinancial services and that are subdivided into subsectors: public nonfinancial cor-porations, private nonfinancial corporations and foreign-controlled nonfinancial corporations.

Reserve requirement ratio is the amount of required reserves, set by the National Bankof Ukraine, as a percentage of the liabilities with regard to the attracted funds by a bank innational and foreign currencies (including in banking metals). A single procedure of determiningand forming the required reserves by all the banks of Ukraine is approved by the Board of theNational Bank of Ukraine.

The National Bank of Ukraine Survey is an analytical form of presenting the statisticaldata of the National Bank of Ukraine that are consolidated into the generalized categories ofassets and liabilities. The Survey comprises data on liabilities of the National Bank of Ukrainethat are included in the monetary base and are the basis for forming the monetary aggregates.

The Depository Corporations Survey (including the National Bank of Ukraine) is an ana-lytical form of presenting the statistical data of the depository corporations (the National Bankof Ukraine and other depository corporations) that are consolidated in the generalized cate-

122

Annual Repor t 2008

gories of assets and liabilities. The Survey comprises data on the liabilities of depository cor-porations that are included in the monetary aggregates. The balance sheet identity in theSurvey ensures the link of monetary aggregate M3 and other items with claims of depositorycorporations on residents and non-residents.

Financial assets and liabilities in the Surveys are classified in accordance with theClassification of Institutional Sectors of the Economy of Ukraine (CISE) by the following institu-tional sectors: financial corporations, general government sector, nonfinancial corporations,households, and nonprofit organizations serving the households.

Official reserve assets (international reserves) are external assets that are controlled bythe National Bank of Ukraine and are readily available for direct financing of the balance of pay-ments deficit, for indirectly regulating the magnitude of such deficit through interventions in theforeign exchange market to influence the exchange rate of hryvnia versus foreign currenciesand/or for other purposes. Official reserve assets are compiled in accordance with the method-ology given in the IMF Manual "International Reserves and Foreign Currency LiquidityGuidelines for a Data Template" (2001).

Official reserve assets are claims on non-residents in hard currency and comprise: foreignexchange reserves, reserve position in the IMF, special drawing rights (SDRs), gold and otherreserve assets that are available for use by the National Bank of Ukraine.

Foreign exchange reserves comprise cash in hard currency and claims of the National Bankof Ukraine on non-residents in the form of short-term deposits in hard currency (except depositsin gold), and securities issued by non-residents.

Reserve position in the IMF are claims of an IMF member on the IMF that are determinedas a difference between the quota and IMF holdings in its (member's) currency minus the IMFholdings received by the member-country as IMF loans and balances on the IMF account No.2which does not exceed 0.1% of the member's quota. The reserve position in the IMF is a partof the member's international reserves.

Special drawing rights (SDRs) are Ukraine's assets within the special drawing rights thatare held on the account of the National Bank of Ukraine with the IMF Treasury.

Gold is monetary gold placed with foreign banks and held in the vault of the State Treasuryof the National Bank of Ukraine. Monetary gold is high-fine gold in the form of coins, bullions,or bars of not less than 995 fineness, that belong to the National Bank of Ukraine. The weightof gold is defined in troy ounces. One troy ounce equals 31,103480 g.

The data (except gold and SDRs) are estimated in the US dollars based on the cross ratesof foreign currencies against the US dollar, that are calculated with the use of the officialexchange rate of hryvnia versus foreign currencies specified by the National Bank of Ukraine atthe end of the period.

Official exchange rate of the hryvnia against foreign currencies is the rate of thenational monetary unit, the hryvnia, officially set by the National Bank of Ukraine versus everyof the foreign currencies. It is set on the basis of exchange rate quotations in the inter-bank for-eign exchange market of Ukraine for the previous day, as well as based on other indicators.

The exchange rate of the hryvnia, average for the period, against foreign currencies is esti-mated: for the monthly data – as the average weighted value of foreign currency in hryvniasper month; for a quarter and a year – as the arithmetic average of monthly values.

Interest income on a repo operation is the income received by a buyer of governmentsecurities of Ukraine or banking metals in case of performing the repo operation based on abilateral agreement between a bank and the National Bank of Ukraine about purchase/sale fromits portfolio of government securities of Ukraine or banking metals with a simultaneous obliga-tion of their repurchase at the agreed price and on the agreed date under a direct agreementwith banks or through a tender of banks' applications for participation in repo operations.Interest income on a repo operation is measured as a difference between the price of reversesale (repurchase) of the portfolio of government securities of Ukraine or banking metals and theprice of purchase.

Revaluation is an increase in the exchange rate of the national monetary unit against for-eign currencies.

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Tables

Dolarization of the economy is the ratio of deposits in foreign currency in the banking sys-tem to the total money supply (ÌÇ) available.

Monetization of the economy is the ratio of the available money supply (ÌÇ) to the nom-inal GDP.

Interest rates. The system of interest rate indicators comprises the main types of ratesused in the economy of Ukraine. The interest rates are subdivided into interest rates of theNational Bank of Ukraine and interest rates of the banks. The interest rates on credits anddeposits are given according to the statistical reporting data of the banks operating in the terri-tory of Ukraine.

In Ukraine the interest rates are calculated in percents per annum. Monthly indicators areestimated according to the compound percent scheme (data on the credits extended and thedeposits attracted serve as the weight base). Quarterly and annual values are defined as thearithmetic average of the monthly values.

Discount rate is a monetary instrument whereby the National Bank of Ukraine sets a pricebenchmark of money for the entities of the money and credit market and is the main interestrate that depends on the trends of the general economic development, macroeconomic andbudgetary processes, as well as on the situation in the money and credit market.

Overnight rate is determined by the National Bank of Ukraine based on the discount rateand taking into account the current situation in the money and credit market, the analysis ofinterest rates in the inter-bank credit market, as well as the demand and possible supply withregard to the issue of money into circulation by the National Bank of Ukraine. The overnight ratemay be differentiated depending on the credit security. Credits are granted to banks for oneworking day on the collateral of government securities (except bonds of external governmentloan of Ukraine) or deposit certificates of the National Bank of Ukraine, and without collateral(blank ones).

Interest rate on credits and deposits is an average weighted rate with consideration ofactual volumes under agreements between banks and economic entities, individuals and statebodies.

Refinancing rate is the interest rate defined by the National Bank of Ukraine on refinanc-ing credits when holding with banks of the quantity tender or interest rate tender depending onthe bids for funds of the National Bank of Ukraine that are received from banks. The refinanc-ing rate is estimated on the basis of the discount rate and depending on the term and type ofrefinancing and cannot be lower than the discount rate.

Securities other than shares are instruments that are negotiable and serving as evidenceof the obligations to be settled by means of providing cash, a financial instrument, or some otheritem of economic value. These are bonds, treasury bills, promissory notes, savings (deposit)certificates of corporations, etc.

Financial corporations are corporations engaged in financial services or in auxiliary finan-cial activities: the National Bank of Ukraine, other depository corporations (banks establishedand operating in the territory of Ukraine) and other financial corporations (insurance companies,non-government pension funds, credit institutions, financial companies, etc).

124

Annual Repor t 2008

Part 5

CONSOLIDATEDFINANCIAL STATEMENTS

for the year ended 31 December 2008

126

Annual Repor t 2008

National Bank of UkraineConsolidated Balance Sheet as at 31 December 2008

AssetsForeign currency funds and deposits 5 115,325 87,753Foreign securities 6 126,983 77,436SDR Holdings 66 14Monetary gold 4,078 2,475State securities of Ukraine 7 9,027 395Loans to banks and other borrowers 8 60,926 1,692Internal State debt 9 10,349 8,099IMF quota contributions 10 16,272 10,949Fixed assets and intangible assets 11 5,568 5,492Other assets 12 1,403 981

Total assets 349,997 195,286

LiabilitiesBanknotes and coins in circulation 167,538 122,471Accounts of banks 13 18,904 19,417Accounts of State and other institutions 14 13,016 15,438Profits payable to the State Budget 18 4,455 4,834Deposit certificates issued by the National Bank of Ukraine 15 2,809 3,117Loans received 124 156Liabilities to the IMF 16 52,649 13,146Other liabilities 17 531 347

Total liabilities 260,026 178,926

EquityStatutory capital 100 100Funds and other reserves 3,861 2,468Revaluation reserve for foreign currency, monetary gold and bank metals 82,009 9,787Revaluation reserve for fixed assets 4,001 4,005

Total equity 19 89,971 16,360

Total liabilities and equity 349,997 195,286

Governor V. S. Stelmakh

Chief Accountant – Director of Accounting Department V.I.Rychakivska

The notes set out on pages 131 to 177 form an integral part of these consolidated financial statements.

(in UAH millions)

Notes 2008 2007

127

Consolidated Financial Statements

National Bank of UkraineConsolidated Income Statement for the year ended 31 December 2008

Interest income 21 5,139 3,643Interest expense 21 (354) (262)

Net interest income 21 4,785 3,381

Fee and commission income 22 512 266Fee and commission expense 22 (136) (5)

Net fee and commission income 22 376 261

Results from operations with debt securities at fair value through profit or loss 6,423 3,622Other income 23 233 140

Total net income 11,817 7,404

Staff costs 24 (1,174) (832)Expenses for production of banknotes, coins, souvenirs and other products (529) (445)Administrative and other expenses 25 (444) (327)Net increase in provisions 26 (323) (165)

Profit available for distribution 19 9,347 5,635


Chief Accountant – Director of Accounting Department V.I.Rychakivska

Deputy Director of Finance Department L.G.Ivashkevych


(in UAH millions)

Notes 2008 2007

128

Annual Repor t 2008

National Bank of UkraineConsolidated Statement of Cash Flows for the year ended 31 December 2008

Operating activities Profit available for distribution 9,347 5,635Adjustments to reconcile profit available for distribution to cash provided by operations:Depreciation and amortisation 11 293 222Net increase in provisions for assets 26 323 165Accrued income (133) (687)Accrued expense 86 (8)Unrealised revaluation of foreign securities (1,784) (983)Other non-cash movements (2) (5)

Net cash inflow before changes in operating assets and liabilities 8,130 4,339

Net increase in foreign securities (10,663) (30,698)Net increase in loans to banks and other borrowers (59, 011) (299)Net increase in other assets (252) (142)Net increase/(decrease) in other liabilities 18 (3)Transfer of profit to the State Budget 18 (8,334) (1 889)

Net cash used in operating activities (70,112) (28,692)

Investment activitiesNet decrease/(increase) in term deposits placed 28,891 (5,699)Purchase of State securities of Ukraine (8,568) –Redemption of State securities of Ukraine – 16Purchase of monetary gold (78) (108)Investment in associate 12 (20) –Acquisition of fixed assets and intangible assets (456) (336)Proceeds from disposal of fixed assets 2 3

Net cash from/(used in) investment activities 19,771 (6,124)


Notes 2008 2007

(in UAH millions)

129


National Bank of UkraineConsolidated Statement of Cash Flows for the year ended 31 December 2008

Financing activitiesIssue of banknotes and coins in circulation 45,067 40,337Repayment of internal State debt 9 255 253Repayment of liabilities to the IMF 16 (1,737) (2,157)Proceeds of loans from IMF 16 25,948 –Net decrease in term deposits received (55) (255)(Repayment)/ issue of deposit certificates of the National Bank of Ukraine (300) 2,925EBRD loans repaid (80) (99)

Net cash from financing activities 69,098 41,004

Effect of changes in exchange rates on cash and cash equivalents 29,301 1,319

Net increase in cash and cash equivalents 48,058 7,507

Cash and cash equivalentsCash and cash equivalents at the beginning of the year (2,908) (10,415)

Cash and cash equivalents at the end of the year 20 45,150 (2,908)

GovernorV. S. Stelmakh

Chief Accountant – Director of Accounting Department

V.I.Rychakivska


Notes 2008 2007

(in UAH millions)

130

Annual Repor t 2008

National Bank of UkraineConsolidated Statement of Changes in Equity for the year ended 31 December 2008

Balance as at 31 December 2006 10 1 756 3 357 759 5 882Revaluation of foreign currency, monetary gold and bank metals – – 6 430 – 6 430Revaluation of fixed assets – – – 3 247 3 247Upward revaluation – – – 3 248 3 248Downward revaluation – – – (1) (1)Realised revaluation of fixed assets – 1 – (1) –Net income recognised directly in equity – 1 6 430 3 246 9 677Profit available for distribution – 5 635 – – 5 635Total recognised income for 2007 – 5 636 6 430 3 246 15 312Contributions into statutory capital 90 (90) – – –Excess of budgeted income over budgeted expenditure for 2007 18 – (4 834) – – (4 834)

Balance as at 31 December 2007 100 2 468 9 787 4 005 16 360Revaluation of foreign currency, monetary gold and bank metals – – 72 222 – 72 222Downward revaluation of fixed assets – – – (3) (3)Realised revaluation of fixed assets – 1 – (1) –Net income recognised directly in equity – 1 72 222 (4) 72 219Profit available for distribution – 9 347 – – 9 347Total recognised income for 2008 – 9 348 72 222 (4) 81 566Excess of budgeted income over budgeted expenditure for 2008 18 – (7 955) – – (7 955)

Balance as at 31 December 2008 100 3 861 82 009 4 001 89 971


Chief Accountant – Director of Accounting Department V.I.RychakivskaDeputy Director of Finance

Department L.G.Ivashkevych


Revaluationreserve for

foreignNotes Statutory Funds currency, Revalua- Total

capital and other monetary tion reserve equityreserves gold and for fixed

bank metals assets

(in UAH millions)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS1. Principal activitiesThe National Bank of Ukraine (the "NBU") is the central bank of Ukraine and operates in

accordance with the Constitution of Ukraine, the Law of Ukraine "On the National Bank ofUkraine" and other laws of Ukraine. In accordance with the legislation, the primary function of theNBU is ensuring the stability of the national currency of Ukraine. The NBU's objectives are alsoto ensure the stability of the banking system and, within the scope of its power, price stability.

The NBU does not aim to earn profits. The financial results of the NBU's activities, as wellas the structure of its assets, liabilities and equity are defined by the functions of the NBU as aspecial central government authority.

In accordance with the Law of Ukraine "On the National Bank of Ukraine" the main func-tions of the NBU are the following:

in accordance with the main principles of monetary policy developed by the NBU Council,to determine and carry out the monetary policy;

in a monopoly capacity, to carry out the issue of national currency of Ukraine and to organ-ise its circulation;

to ensure accumulation and maintenance of foreign (gold and foreign currency) reserves(hereinafter referred to as "international reserves") and perform operations with internationalreserves and bank metals;

be a lender of the last resort for banks and to organise a system of refinancing;to exercise banking regulation and supervision;to represent Ukraine in other central banks, international banks and other credit institutions

where co-operation is maintained between the central banks;to exercise other functions in financial and credit areas within the competence defined by

the Law.According to the Law of Ukraine "On the National Bank of Ukraine", the NBU provides loans

to banks to support their liquidity, buys and sells securities in the secondary market, buys andsells foreign currency valuables, precious metals, sells commemorative coins made of preciousand non-precious metals in the domestic and foreign markets, performs operations of servicingof the State debt in respect of placement of State securities, their redemption and interest pay-ments, maintains accounts of the State Treasury of Ukraine, accounts of international organi-sations and conducts other operations necessary for the performance of its functions. The NBUalso performs functions of a depository for State securities of Ukraine.

The statutory capital of the NBU is owned by the State.The NBU system includes 25 regional offices throughout Ukraine. Additionally, the NBU's

structure includes Operating Department, Household and Maintenance Department, the CentralVault, the State Treasure-House of Ukraine, the Project Monitoring Unit for International CreditLines, the Central Clearing House, Printing and Minting Works and Banknote Paper Mill. TheNBU's subsidiaries are Ukrainian Banking Academy (Sumy) and Banking University (Kyiv), bothof which are 100% owned by the NBU. The structure of the Banking University includes Lviv,Kharkiv and Cherkassy Banking Institutes.

Registered address and place of business of the NBU's central office is 9, Institutska St.,01601, Kyiv-8, Ukraine.

2. Basis of presentation and accounting policiesThe NBU's accounting policies are defined in accordance with the NBU regulations and are

developed based on International Financial Reporting Standards ("IFRS"), except for the caseswhen the NBU applies specific accounting policies to comply with the requirements of the cur-rent Ukrainian legislation, in particular the Law of Ukraine On the National Bank of Ukraine.Management of the NBU believes this is an appropriate and robust accounting framework whichcan be, and has been, consistently applied. Major differences between the NBU's accountingpolicies and IFRS are as follows:

131


the result from the revaluation of assets and liabilities denominated in foreign currencies,monetary gold and bank metals resulting from changes in official exchange rate of Ukrainianhryvnia to foreign currencies, monetary gold and bank metals, including the realised revalua-tion result, are posted directly to revaluation reserve in the equity section. This differs from therequirements of International Accounting Standard (IAS) 21 "Effect of Changes in ExchangeRates" in respect of recognition of the revaluation result as income and expenses in the state-ment of income;

internal State debt and State securities of Ukraine held to maturity are accounted for at costless provision for impairment. Provision for impairment is raised in the amounts approved by theNBU's Board and agreed with the NBU Council or as stipulated by the current Ukrainian legis-lation. This is different from the requirements of IAS 39 "Financial Instruments: Recognition andMeasurement" in respect of assessment of provisions, interest recognition and carrying valueof these assets respectively. Refer to Notes 6, 9 and 34.

These financial statements have been prepared in accordance with the NBU's accountingpolicies set out below under the historical cost convention, as modified by the revaluation ofpremises and constructions and financial instruments categorised as at fair value through prof-it or loss. The accounting policies have been consistently applied to all the periods presented,except as stated in the following paragraph.

As disclosed in Note 4, during October-December 2008 due to a sharp deterioration of eco-nomic conditions and lack of liquidity in the banking market, the NBU significantly increased thevolume of refinancing operations with Ukrainian banks. Due to significant uncertainty associat-ed with the current economic conditions, the NBU is not able to reliably estimate future cash-flows in respect of loans issued to Ukrainian banks during the fourth quarter of 2008 for the pur-poses of calculating provision for impairment of these loans.

The functional and presentation currency of the NBU is the national currency of Ukraine,the Ukrainian hryvnia ("UAH"). The financial statements of the NBU are prepared in millions ofUkrainian hryvnia.

Adoption of new and revised standards and interpretationsCertain new or amended IFRSs and interpretations are mandatory for application from 1

January 2008. Listed below are those amended IFRS which are relevant to the NBU's opera-tions in the reporting period:

Reclassification of Financial Assets-Amendments to IAS 39, Financial Instruments:Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures and a subse-quent amendment, Reclassification of Financial Assets: Effective Date and Transition. Theamendments allow entities the options (a) to reclassify a financial asset out of the held for trad-ing category if, in rare circumstances, the asset is no longer held for the purpose of selling orrepurchasing it in the near term; and (b) to reclassify an available-for-sale asset or an asset heldfor trading to the loans and receivables category, if the entity has the intention and ability to holdthe financial asset for the foreseeable future or until maturity (subject to the asset otherwisemeeting the definition of loans and receivables). The amendments may be applied with retro-spective effect from 1 July 2008 for any reclassifications made before 1 November 2008; thereclassifications allowed by the amendments may not be applied before 1 July 2008 and retro-spective reclassifications are only allowed if made prior to 1 November 2008. Any reclassifica-tion of a financial asset made on or after 1 November 2008 takes effect only from the date whenthe reclassification is made. The NBU has not elected to make any of the optional reclassifica-tions during the period.

Listed below are those amended IFRS which became effective from 1 January 2008 but arenot relevant to the NBU's operations:

IFRIC 11, IFRS 2-Group and Treasury Share Transactions (effective for annual periodsbeginning on or after 1 March 2007);

IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on orafter 1 January 2008);

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IFRIC 14, IAS 19-The Limit on a Defined Benefit Asset, Minimum Funding Requirementsand their Interaction (effective for annual periods beginning on or after 1 January 2008).

As at the date of approval of these financial statements certain changes to IFRS have beenpublished that become effective for annual periods beginning on or after 1 January 2009.

Changes to IFRS which the NBU has not early adopted and which the NBU intends apply-ing in subsequent reporting periods:

IAS 1, Presentation of Financial Statements The main change in IAS 1 is the replacement of the income statement by a statement of

comprehensive income which will also include all non-owner changes in equity, such as therevaluation of available-for-sale financial assets. Alternatively, entities will be allowed to presenttwo statements: a separate income statement and a statement of comprehensive income. Therevised IAS 1 also introduces a requirement to present a statement of financial position (bal-ance sheet) at the beginning of the earliest comparative period whenever the entity restatescomparatives due to reclassifications, changes in accounting policies, or corrections of errors.The NBU expects the revised IAS 1 to affect the presentation of its financial statements but tohave no impact on the recognition or measurement of specific transactions and balances.

IAS 27, Consolidated and Separate Financial StatementsThe revised IAS 27 will require an entity to attribute total comprehensive income to the own-

ers of the parent and to the non-controlling interests (previously "minority interests") even if thisresults in the non-controlling interests having a deficit balance (the current standard requiresthe excess losses to be allocated to the owners of the parent in most cases). The revised stan-dard specifies that changes in a parent's ownership interest in a subsidiary that do not result inthe loss of control must be accounted for as equity transactions. It also specifies how an entityshould measure any gain or loss arising on the loss of control of a subsidiary. At the date whencontrol is lost, any investment retained in the former subsidiary will have to be measured at itsfair value. The NBU does not expect the amended standard to have any material effect on itsconsolidated financial statements.

IFRS 3, Business Combinations The revised IFRS 3 will allow entities to choose to measure non-controlling interests using

the existing IFRS 3 method (proportionate share of the acquiree's identifiable net assets) or atfair value. The revised IFRS 3 is more detailed in providing guidance on the application of thepurchase method to business combinations. The requirement to measure at fair value everyasset and liability at each step in a step acquisition for the purposes of calculating a portion ofgoodwill has been removed. Instead, in a business combination achieved in stages, the acquir-er will have to remeasure its previously held equity interest in the acquiree at its acquisition-datefair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-relatedcosts will be accounted for separately from the business combination and therefore recognisedas expenses rather than included in goodwill. An acquirer will have to recognise at the acquisi-tion date a liability for any contingent purchase consideration. Changes in the value of that lia-bility after the acquisition date will be recognised in accordance with other applicable IFRSs, asappropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope busi-ness combinations involving only mutual entities and business combinations achieved by con-tract alone. The NBU does not expect the amended standard to have any material effect on itsconsolidated financial statements.

Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual

improvements project as a method of making necessary, but non-urgent, amendments to IFRS.The amendments consist of a mixture of substantive changes, clarifications, and changes in ter-minology in various standards. The substantive changes relate to the following areas: classifi-cation as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility ofpresentation of financial instruments held for trading as non-current under IAS 1; accounting forsale of IAS 16 assets which were previously held for rental and classification of the related cash

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flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtail-ment under IAS 19; accounting for below market interest rate government loans in accordancewith IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effectiveinterest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS5; reduction in the disclosure requirements relating to associates and joint ventures under IAS28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting foradvertising costs under IAS 38; amending the definition of the fair value through profit or losscategory to be consistent with hedge accounting under IAS 39; introduction of accounting forinvestment properties under construction in accordance with IAS 40; and reduction in restric-tions over manner of determining fair value of biological assets under IAS 41. Further amend-ments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or edito-rial changes only, which the IASB believes have no or minimal effect on accounting. The NBUdoes not expect the amendments to have any material effect on its consolidated financial state-ments.

Improving Disclosures about Financial Instruments – Amendment to IFRS 7, FinancialInstruments: Disclosures (issued in March 2009; effective for annual periods beginning on orafter 1 January 2009)

The amendment requires enhanced disclosures about fair value measurements and liquid-ity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysisof liabilities should include issued financial guarantee contracts at the maximum amount of theguarantee in the earliest period in which the guarantee could be called; and (b) requires dis-closure of remaining contractual maturities of financial derivatives if the contractual maturitiesare essential for an understanding of the timing of the cash flows. An entity will further have todisclose a maturity analysis of financial assets it holds for managing liquidity risk, if that infor-mation is necessary to enable users of its financial statements to evaluate the nature and extentof liquidity risk. The NBU is currently assessing the impact of the amendment on disclosures inits consolidated financial statements.

New standards, changes to standards and interpretations that are not relevant to the NBU'soperations:

IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January2009);

Puttable Financial Instruments and Obligations Arising on Liquidation-IAS 32 and IAS 1Amendment (effective for annual periods beginning on or after 1 January 2009);

IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on orafter 1 January 2009);

Vesting Conditions and Cancellations-Amendment to IFRS 2, Share-based Payment(issued in January 2008; effective for annual periods beginning on or after 1 January 2009);

IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after1 July 2008);

IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periodsbeginning on or after 1 January 2009);

IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periodsbeginning on or after 1 October 2008);

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate-IFRS 1 and IAS27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1January 2009);

Eligible Hedged Items-Amendment to IAS 39, Financial Instruments: Recognition andMeasurement (effective with retrospective application for annual periods beginning on or after1 July 2009);

IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods begin-ning on or after 1 July 2009);

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IFRS 1, First-time Adoption of International Financial Reporting Standards (following anamendment in December 2008, effective for the first IFRS financial statements for a periodbeginning on or after 1 July 2009);

IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on orafter 1 July 2009).

Key measurement termsDepending on their classification the financial assets and liabilities are carried at fair value,

cost or amortised cost.Fair value is the amount for which an asset could be exchanged, or a liability settled,

between knowledgeable, willing parties in an arm's length transaction. Fair value is the currentbid price for financial assets and current asking price for financial liabilities which are quoted inan active market. A financial instrument is regarded as quoted in an active market if quotedprices are readily and regularly available from an exchange or other institution and those pricesrepresent actual and regularly occurring market transactions on an arm's length basis.

In other than active markets, the most recent arm's length transactions are the basis of cur-rent fair values. Fair value is not the amount that an entity would receive or pay in a forcedtransaction, involuntary liquidation or distress sale.

Valuation techniques such as discounted cash flows models and consideration of financialdata of the investees are used to fair value certain financial instruments for which external mar-ket pricing information is not available. Valuation techniques may require assumptions not sup-ported by observable market data. Disclosures are made in these financial statements if chang-ing any such assumptions to a reasonably possible alternative results in significantly differentprofit, income, total assets or total liabilities.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consider-ation given to acquire an asset at the time of its acquisition and includes transaction costs.Measurement at cost is only applicable to investments in equity instruments that do not have aquoted market price and whose fair value cannot be reliably measured, as well as to internalState debt and promissory notes of State Treasury of Ukraine.

Transaction costs are incremental costs that are directly attributable to the acquisition, issueor disposal of a financial asset or financial liability. The incremental cost is one that would nothave been incurred if the transaction had not taken place. Transaction costs do not include debtpremiums or discounts, financing costs or internal administrative or holding costs.

Amortised cost is the amount at which the financial asset or liability was recognised at ini-tial recognition less any principal repayments, plus or minus the cumulative amortisation usingthe effective interest method of any difference between that initial amount and the maturityamount, and for financial assets less any write-down for incurred impairment losses.

The effective interest method is a method of calculating amortised cost of financial asset orfinancial liability and allocating interest income or interest expense over the relevant period. Theeffective interest rate is the rate that exactly discounts estimated future cash payments orreceipts (excluding future credit losses) through the expected life of the financial instrument ora shorter period, if appropriate, to the net carrying amount of the financial asset or financial lia-bility.

Transactions in foreign currency and monetary gold Monetary assets and liabilities denominated in foreign currency and monetary gold are ini-

tially recorded at the official exchange rates of hryvnia to foreign currencies and gold at the dateof settlement – the date of initial recognition of assets and liabilities. Subsequently they arerevalued after each change in the official exchange rate*.

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* The official exchange rate of hryvnia to US dollar is set based on the currency quote on interbank foreignexchange market based on results of functioning of Deal confirmation system for interbank foreignexchange market for the previous working day. The official exchange rate of hryvnia to other foreign cur-rencies is set based on the official exchange rate of hryvnia to US dollar and cross-rates of respective cur-rencies on international markets.

Monetary assets and liabilities in foreign currency and monetary gold are recorded at theofficial exchange rates of hryvnia to foreign currencies at the balance sheet date.

Non-monetary assets and liabilities denominated in foreign currency are recorded at his-torical cost (at the official exchange rate of hryvnia to foreign currencies at the settlement date).

Monetary gold consists of the stocks of gold bars of international standard held in the StateTreasure-House of Ukraine. Monetary gold represents a part of international reserves.Monetary gold is recorded in physical weight in troy ounces and is valued in hryvnias at the offi-cial exchange rate of the NBU. The official exchange rate is calculated based on information onprecious metals prices determined (fixed) by participants of the London Bullion MarketAssociation in US dollars translated into UAH at the NBU official UAH/US dollar exchange rate.

Interest-bearing gold placements with foreign banks are included in foreign currency fundsand deposits.

The principal official exchange rates of hryvnia to foreign currencies and monetary goldused for translating monetary balance sheet items were:

31 December 2008 31 December 2007 (UAH) (UAH)

USD 1 7,7000 5,050000SDR 1 11,8601 7,980253EUR 1 10,8555 7,4194601 troy ounce of gold 6 699,000 4 183,925

Operations with International Monetary Fund The NBU acts as the depository and fiscal agent of Ukraine in the relationship of

Ukraine with the International Monetary Fund (IMF). All claims of Ukraine on and liabilitiesto the IMF are recorded in the financial statements of the NBU. The IMF asset balancesinclude holdings of Special Drawing Rights (SDR) and IMF quota contributions. Liabilitiesto the IMF include securities issued to the IMF by the Ministry of Finance of Ukraine andthe NBU as a fiscal agent and balances on IMF accounts No. 1 and No. 2. IMF accountNo. 1 is used for IMF transactions including subscription payments, purchase and repur-chase of funds. Account No. 2 is used for settlements with the IMF in Ukrainian currency.

Assets and liabilities denominated in SDRs are translated into hryvnia at the NBU offi-cial exchange rate of hryvnia to SDR at the balance sheet date. The official exchange rateof hryvnia to SDR is calculated based on information on the exchange rate of SDR to USDset by the IMF and the NBU official UAH/USD exchange rate.

Interest received in respect of SDR holdings is disclosed as interest income andcharges paid in respect of use of the IMF funds are disclosed as interest and fee expense,as appropriate, in the statement of income.

Operations with financial instrumentsFinancial assets of the NBU are classified depending on intentions of their acquisition

as follows:Foreign currency funds and deposits Foreign currency funds and deposits are recorded when the NBU advances foreign

currency funds to counterparty banks with no intention of trading the resulting unquotednon-derivative receivable due on fixed or determinable dates.

Debt securities at fair value through profit or lossThis category includes securities which the NBU intends to hold for the purposes of

managing international reserves and which are designated at initial recognition into thiscategory. The NBU manages a group of these financial instruments and evaluates its per-formance on a fair value basis in accordance with a documented investment declaration,

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and information on that basis is regularly provided to and reviewed by management of theNBU. The fair value of these securities is determined by reference to market quotations.Securities from this category may not be reclassified to securities available for sale or heldto maturity.

Investments available for sale are equity investments (investments into share capi-tal of companies which are not associates or subsidiaries), which the NBU intends to holdfor an indefinite period of time.

Securities held to maturity are debt securities with fixed or determinable paymentsand fixed maturity which the NBU has both the intent and ability to hold to maturity.

Loans to banks and other borrowers Loans to banks and other borrowers are recorded when the NBU advances money to

originate an unquoted non-derivative receivable from a counterparty bank or other bor-rower due on fixed or determinable dates and has no intention of trading the receivable.

Financial instruments recognition and measurementFinancial instruments other than internal State debt are recognised as follows:transactions with financial instruments are recorded in the balance sheet at settlement

date, the date when the ownership right for these assets is transferred to (from) the NBU; debt securities at fair value through profit or loss are initially recorded at fair value; foreign currency funds and deposits, investments available for sale, debt securities

held to maturity, loans to banks and other borrowers and all financial liabilities are initial-ly recorded at fair value plus transaction costs.

Subsequent measurement of the NBU's financial instruments is as follows:debt securities at fair value through profit or loss are revalued to fair value after each

change in market price. The result from changes in fair value is recognised in the state-ment of income in the period in which it arises;

equity investments available for sale whose fair value cannot be reliably determinedare recorded at cost less provision for impairment, if any;

foreign currency funds and deposits, debt securities held to maturity, State securitiesclassified as loans and receivables and loans to banks and other borrowers are recordedat amortised cost using effective interest method.

Provisions for impairment of financial assets Impairment losses are recognised in the statement of income when incurred as a

result of one or more events ("loss events") that occurred after the initial recognition of thefinancial asset and which have an impact on the estimated future cash flows of the finan-cial asset or group of financial assets that can be reliably estimated.

The objective evidence of impairment of financial assets is information on the follow-ing loss events:

the borrower experiences significant financial difficulties; breach of contract by the borrower;possibility of bankruptcy or other financial reorganisation of the borrower;the lender, for economic or legal reasons relating to the borrower's financial difficulty,

granting to the borrower a concession that the lender would not otherwise consider (suchas a change in interest rate or extension of payment terms);

observable data indicating that there is a measurable decrease in the estimated futurecash flows from a group of financial assets since the initial recognition of those assets.

If the NBU determines that no objective evidence exists that impairment has beenincurred for an individually assessed financial asset, whether significant or not, it includesthe asset in a group of financial assets with similar credit risk characteristics and collec-tively assesses them for impairment.

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Losses from impairment are recognised through inclusion of respective amount intoexpenses. The amount of impairment is calculated as a difference between the financialasset's carrying amount and the present value of expected cash flows discounted at theoriginal effective interest rate of the asset.

If, in a subsequent period, the amount of the impairment loss decreases and thedecrease can be related objectively to an event occurring after the impairment has beenrecognised, the previously recognised impairment loss is reversed by adjusting theallowance account through profit or loss.

When impaired financial assets are renegotiated or their terms otherwise modifiedbecause of financial difficulties of the borrower, impairment is measured using the originaleffective interest rate before the modification of terms.

Uncollectible assets are written off against the related impairment loss provision afterall the necessary procedures to recover the asset have been completed and the amountof the loss has been determined.

Provisions against internal State debt are raised in accordance with the requirementsof the Ukrainian legislation and decisions approved by the NBU Council.

Internal State debtInternal State debt includes loans granted to the Government of Ukraine in national

and foreign currencies. The loans are stated at the principal amounts outstanding net ofprovisions created in accordance with the requirements of the Ukrainian legislation anddecisions approved by the NBU Council.

The Law of Ukraine "On Restructuring the Debt of the Cabinet of Ministers of Ukraineto the National Bank of Ukraine" of 20 April 2000 (hereinafter referred to as "the Law onRestructuring") provides for interest payment on loans to Government in national curren-cy. However, the Law does not clearly specify when the interest payment period shouldcommence in respect of historical debt. Additionally, the Law does not contain any provi-sion in respect of interest payment on loans to Government in foreign currency and so nointerest has been accrued to date (see Note 9).

Sale and repurchase agreementsFunds paid under agreements for purchase and sale of securities ("repo") are record-

ed as loans to banks. The differences between the purchase and resale prices are treat-ed as interest income and accrued evenly over the life of the repo agreement.

Funds received under sale and repurchase agreements are included in accounts ofbanks. Securities sold under sale and repurchase agreements are retained as the assetsof the NBU. The differences between the sale and repurchase prices are treated as inter-est expense and accrued evenly over the life of the repo agreement.

Fixed assets Fixed assets are stated at cost, or revalued amounts, as described below, less accu-

mulated depreciation. Premises and constructions of the NBU are subject to revaluation on a regular basis.

The frequency of revaluation depends upon the movements in the fair values of the prem-ises and constructions being revalued. The revaluation reserve for fixed assets is includ-ed in equity. The revaluation reserve is transferred directly to retained earnings when thesurplus is realised, i.e. either on the retirement or disposal of the asset.

Costs of enhancement of any item of fixed assets which increases the expected eco-nomic benefits embodied in this item of fixed assets increase the asset's historical cost orrevalued amount. Costs of minor repairs and maintenance are expensed when incurred.Cost of replacing major parts or components of fixed assets items are capitalised and theresidual value of the replaced part is charged to expenses of current period.

If impaired, fixed assets are written down to the higher of their value in use and fair

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value less costs to sell. The decrease in carrying amount is charged to profit or loss to theextent it exceeds the previous revaluation surplus in equity. An impairment loss recognisedfor an asset in prior years is reversed if there has been a change in the estimates used todetermine the asset's value in use or fair value less costs to sell.

Gains and losses on disposals determined by comparing proceeds with carryingamount are recognised in profit or loss.

Construction in progress is carried at cost. Upon completion, assets are transferred tobuildings and constructions at cost. Construction in progress is not depreciated until theasset is available for use.

DepreciationDepreciation of fixed assets commences after the assets are available for use and is

calculated using the straight-line method to allocate their cost or revalued amounts to theirresidual values over their estimated useful lives as follows:

buildings and constructions 20–50 years;motor vehicles and transport 8–28 years;machinery and equipment 4–30 years;fixtures and fittings 4–10 years;other 2–10 years.

The residual value of an asset is the estimated amount that the NBU would currently obtainfrom disposal of the asset less the estimated costs of disposal, if the asset were already of theage and in the condition expected at the end of its useful life. The residual value of an asset isnil if the NBU expects to use the asset until the end of its physical life.

Intangible assetsAll of the NBU's intangible assets have a definite useful life and primarily include capitalised

computer software and licences.Historical cost of acquired intangible assets includes costs incurred to acquire and bring

them to use. Acquired intangible assets are amortised on a straight line basis over expecteduseful lives of 3 to 8 years.

Consolidation of subsidiariesSubsidiaries are those companies in which the NBU has the power to govern their financial

or operating policies normally through an interest of more than 50% of the voting rights. All theNBU's subsidiaries are wholly owned by the NBU (refer to Note 1). Subsidiaries are consoli-dated from the date on which control is transferred to the NBU (acquisition date) and are de-consolidated from the date that control ceases.

Intra-company transactions, balances and unrealised gains on transactions between groupcompanies are eliminated on consolidation. The NBU and its subsidiaries use uniform account-ing policies.

Investments in associates Associates are entities in which the NBU has between 20% and 50% of the voting rights. Investments in associates are accounted for under the equity method and recognised in

other assets. The NBU's share of the post-acquisition profits or losses of associates is record-ed in the statement of income as other income.

Bank metals and other precious metalsBank metals include stocks of gold which is not monetary, silver, platinum and palladium

held in the State Treasure-House of Ukraine. Bank metals are recorded in physical weight introy ounces and are valued at the official exchange rate of the NBU. The official exchange rateis calculated based on information on precious metals prices determined (fixed) by participantsof the London Bullion Market Association and participants of the London Platinum andPalladium Market and the NBU official UAH/USD exchange rate.

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Annual Repor t 2008

The official exchange rates of bank metals to UAH at which bank metals are stated in thebalance sheet were as follows:

31 December 2008 31 December 2007 (UAH) (UAH)

1 troy ounce of gold 6,699.000 4,183.9251 troy ounce of silver 83.391 74.4881 troy ounce of platinum 6,983.900 7,721.4501 troy ounce of palladium 1,412.950 1,823.050

Interest-bearing placements in bank metals with foreign banks are included in foreign cur-rency funds and deposits.

Other precious metals include gold and other scrap metal and bars which are not of a recog-nised standard. Other precious metals are recognised as inventory and are carried at historical cost.

Bank metals and other precious metals are included in other assets item.

Banknotes and coins in circulationThe amount of banknotes and coins in circulation represents the nominal value of ban-

knotes and coins (small change, circulating and commemorative coins) that can be used aspayment instruments and were issued into circulation by the NBU after the introduction of hryv-nia into circulation in September 1996. The banknotes and coins in circulation are recorded asa liability at their nominal value when cash is issued by the NBU to banks and clients of theNBU. Cash in national currency held in the NBU's vaults and cash offices is not included in ban-knotes and coins in circulation.

Accounts of banks Accounts of banks are recorded when money are advanced to the NBU by counterparty

banks. The non-derivative liability is carried at amortised cost.

Accounts of State and other institutionsAccounts of State and other institutions are non-derivative liabilities to state or other cus-

tomers and are carried at amortised cost.

Deposit certificates issued by the NBUDeposit certificates issued by the NBU are initially recorded at fair value and subsequently

are measured at amortised cost using effective interest method. Upon redemption of depositcertificates issued by the NBU, the difference between the consideration paid and amortisedcost is included in gains or losses arising from retirement of debt in the statement of income.

Loans receivedLoans received by the NBU are carried at amortised cost using effective interest method.

Loans received represent long-term loans granted under credit lines of the European Bank forReconstruction and Development ("EBRD") for the purposes of providing financing to banks forsupport of small and medium enterprises ("SME").

Income and expense recognitionInterest income and expense are recorded in the income statement on an accrual basis

using the effective interest method for all debt instruments, except for debt securities at fairvalue through profit or loss. This method defers, as part of interest income or expense, all feespaid or received between the parties to the contract that are an integral part of the effectiveinterest rate, transaction costs and all other premiums or discounts.

All other fees, commissions and other income and expense items are generally recordedon an accrual basis by reference to completion of the specific transaction assessed on the basisof the actual service provided as a proportion of the total services to be provided.

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Expenses for money issuanceThe NBU produces Ukrainian national currency banknotes and coins. Expenses associat-

ed with the banknotes and coins production (excluding commemorative coins made of preciousmetals) are charged to the NBU's expenses when produced banknotes and coins are trans-ferred by Printing and Minting Works to the Central Vault of the NBU. Expenses for moneyissuance include depreciation of plant and machinery, staff costs and other production costs.

Expenses associated with the production of commemorative coins made of precious met-als are recorded as an asset within other assets line item of the NBU balance sheet and arecharged to expenses in the period when the coins are sold.

Staff costsWages, salaries, contributions to the State social funds, paid annual leave and sick leave,

bonuses, and non-monetary benefits are accrued in the year in which the associated servicesare rendered by the employees of the NBU.

Expenses for contributions to obligatory State social funds Under the Ukrainian legislation, the NBU makes contributions to the obligatory State social

funds including pension fund, social security for temporary disability, obligatory State socialsecurity fund for unemployment and accident social security fund. Contributions to the obliga-tory State social funds are expensed as incurred.

Corporate Non-State Pension FundThe NBU established a corporate non-State pension fund which is a defined contribution

plan. The NBU pays contributions to this fund on a contractual basis. The NBU has no furtherpayment obligations once the contributions have been paid. The contributions are recognisedas staff costs when they are due.

The NBU acts as administrator, asset manager and custodian of Corporate non-State pen-sion fund of the National Bank of Ukraine.

Revaluation reserve for foreign currency, monetary gold and bank metalsThe result arising from revaluation of monetary assets and liabilities denominated in foreign

currency, monetary gold and bank metals due to changes in exchange rates of hryvnia to for-eign currency, monetary gold and bank metals, including realised revaluation surplus, ischarged or credited to the revaluation reserve for foreign currency, monetary gold and bankmetals in the equity section of the balance sheet and is not taken into account when calculat-ing the net profit or loss.

Cash and cash equivalentsFor the purposes of reporting cash flows reflecting changes in both foreign and domestic

liquidity, cash and cash equivalents include financial assets which are on demand or maturingwithin three months and which are available for use at short notice and are subject to insignifi-cant risk of changes in value, as well as liabilities which are on demand except for banknotesand coins in circulation. As the NBU is the issuer of national currency, the source of liquidity inthe national currency is represented by liabilities which are on demand (correspondentaccounts of banks, accounts of Government, IMF accounts and other).

Financial assets that cannot be freely converted into cash due to insufficient liquidity or dueto restrictions on their use are excluded from cash and cash equivalents.

Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet

only when there is a legally enforceable right to offset the recognised amounts, and there is anintention to either settle on a net basis, or to realise the asset and settle the liability simultane-ously.

Amendments of the financial statements after issueThe NBU's Board has the power to amend the financial statements after issue.

3. Critical accounting estimates and judgements in applyingaccounting policies

The NBU makes estimates, assumptions and judgements that affect the amounts of assets andliabilities reported in the financial statements for the current year and those reported within the nextfinancial year. Estimates and judgements are continually evaluated and are based on manage-ment's experience and other factors, including expectations of future events that are believed to bereasonable under the circumstances. The most significant estimates and judgements include:

Impairment of loans to banks and other borrowersThe NBU regularly reviews its loan portfolio (excluding internal State debt) to assess impair-

ment. In determining whether an impairment loss should be recorded, the NBU makes judge-ments as to whether there is any observable data indicating that there is a measurable decreasein the estimated future cash flows. The NBU uses estimates based on historical loss experiencefor assets with credit risk characteristics and objective evidence of impairment similar to those inthe portfolio when scheduling its future cash flows. To the extent that the net present value ofestimated cash flows differs by +/-5 percent, the provision would be estimated UAH 20 millionlower or UAH 20 million higher (2007: UAH 16 million lower or UAH 16 million higher).

As disclosed in Note 4, during October-December 2008, due to the sharp deterioration ofeconomic conditions and lack of liquidity in the banking market, the NBU significantly increasedthe volume of refinancing operations with Ukrainian banks. Due to significant uncertainty asso-ciated with the current economic conditions, the NBU is not able to reliably estimate future cash-flows in respect of loans totalling UAH 60,716 million issued to Ukrainian banks to support theirliquidity during 2008, for the purposes of calculating provision for impairment of these loans andfair value disclosure.

Fair value of buildings and constructionsAs stated in Note 2, buildings and constructions of the NBU are subject to revaluation on a

regular basis. Such revaluations are based on the results of work of independent valuers. Thebasis for their work is sales comparison and income capitalisation approach, except for thoseitems that are of a highly specialized nature which are valued at depreciated replacement cost.When performing the revaluation certain judgements and estimates are applied by the valuers indetermination of the comparative premises to be used in sales comparison approach. The valu-ation was based on comparative sales of premises with the price per square meter varying fromUAH 213 for household premises to UAH 39,612 for office premises depending upon the loca-tion of premises. To the extent that the price per square meter differs by +/-5 percent, the fairvalue of buildings and constructions would be UAH 174 million higher or UAH 174 million lower.

Related party transactionsIn the normal course of business the NBU enters into transactions with its related parties

being mainly Government and State-controlled entities. IAS 39 requires initial recognition offinancial instruments based on their fair values. Judgement is applied in determining if trans-actions are priced at market or non-market interest rates, where there is no active market forsuch transactions. The basis for judgement is pricing for similar types of transactions with unre-lated parties and effective interest rate analysis. Terms and conditions of related party balancesare disclosed in Note 36.

4. Effect of economic conditions on the financial position and resultsof operations of the NBU

The NBU's monetary policy was carried out in 2008 in difficult macroeconomic conditions.GDP growth for the year was 2.1%, being the lowest for the period since recovery of econom-ic growth processes in 1999 (2007: GDP growth was 7.9%). Production output decreased in thelast quarter of 2008 which led to an annual decrease of 3.1%.

142

Annual Repor t 2008

The consumer price index in 2008 was 122.3% as a result of both external and internal fac-tors (2007: consumer price index was 116.6%). In this situation the NBU's monetary policy wasof anti-inflationary nature. In particular, the NBU discount rate increased from 31 December2007 by 4 per cent and was 12% p.a. as at 31 December 2008.

Worsening economic situation in Ukraine was to some extent resulting from reduction inglobal liquidity and economic growth in most of economies in the world. This, on the one hand,limited access of enterprises and banks to external borrowings, on the other hand, due tounfavourable market situation there was a decrease in demand for traditional Ukrainian exports.Additionally, the country ratings by international rating agencies were downgraded in October2008. These factors led to a significant worsening of the balance of payments and resulted insignificant downward pressure on the hryvnia exchange rate. The official exchange rate of hryv-nia to USD as at 31 December 2008 was UAH 7.7000 per USD 1 (31 December 2007: UAH5.0500 per USD 1).

Under conditions of significant decrease in supply of foreign currency during the fourthquarter of 2008, the NBU actively performed interventions in the interbank foreign exchangemarket to decrease the foreign exchange deficit and downward pressure on Ukrainian hryvnia.As a result international reserves of the NBU were decreasing starting from September 2008.During 2008 international reserves decreased from USD 32.5 billion as at 31 December 2007to USD 31.5 billion as at 31 December 2008. At the same time the level of international reserveswas supported by the receipt of the first tranche of USD 4.5 billion of IMF loan under stand-byprogramme. The loan is expected to have a positive effect on the Ukrainian economy, easingthe effect of the crisis and promoting financial stability, however the receipt of the next tranch-es depends on Ukraine implementing actions envisaged by respective Memorandum ofEconomic and Financial Policies between Ukraine and the IMF.

During the period of particular tension on financial markets, characterised by an outflow ofdeposit funds from banks, in October-November 2008 the NBU undertook a number of stabili-sation actions in order to ensure timeliness of bank settlements, performance of obligations bybanks and prevention of outflow of funds from the banking system. In particular, a range of liq-uidity support instruments was extended (including through extension of the list of assets whichmay be pledged under refinancing agreements with the NBU), Ukrainian banks' mandatoryreserves requirements were temporarily eased.

Upon certain stabilisation of the monetary market situation at the end of November 2008,the NBU was taking actions to limit speculative demand for foreign currency. In particular, theNBU decreased the levels of liquidity support to banks and adjusted mandatory reserve require-ments in order to make local currency denominated transactions more attractive (mandatoryreserve requirement in respect of local currenñy funds was decreased to zero).

Interest rate policy of the NBU during the period was aimed at increasing the cost of moneyto ease inflationary and devaluation pressure. For this purpose the NBU increased the interestrates on refinancing and deposit operations.

The Ukrainian economy displays characteristics of an emerging market. These character-istics include the existence of a national currency that is not freely convertible outside the coun-try, a relatively high level of inflation, a low level of liquidity in the public and private debt andequity markets, and budgetary constraints. As a result in December 2008 the NBU transferredto the State budget of Ukraine UAH 3,500 million in respect of the excess of budgeted incomeover budgeted expenditure for 2008 (refer to Note 18).

Budgetary constraints also impact on the ability of Government to repay amounts due to theNBU. In accordance with the Law on Restructuring, repayment of restructured loans providedto the Government for financing of the budget deficit in foreign currency, which are included inthe internal State debt, was scheduled to commence in 2002. However, repayment of the inter-nal State debt in foreign currency commenced only in 2005. During 2008 in accordance with theLaw of Ukraine On State Budget of Ukraine for 2008, the Government of Ukraine repaid a cer-tain part of the outstanding balance of loans in foreign currency amounting to USD 33 million

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(UAH 255 million at the official exchange rate at the date of transaction) (2007: USD 50 million,or UAH 253 million at the official exchange rate at the date of transaction) (refer to Note 9).

The balance sheet items representing amounts due from Government are summarised inthe table below.

(in UAH millions)Note 2008 2007

State securities of Ukraine 7 9 027 395Internal State debt 9 10 349 8 099

The estimated fair value of amounts due from Government is disclosed in Note 34.The NBU believes that it is not possible to reliably estimate the effects on the NBU's finan-

cial position of any further possible deterioration in the liquidity of the financial markets and theirincreased volatility.

5. Foreign currency funds and deposits(in UAH millions)

2008 2007

Financial assetsForeign currency cash 90 76Demand deposits 21,591 2,408Term deposits in foreign currency: 90,144 82,312Accrued interest receivable on deposits in gold and bank metals 6 11Total financial assets 111,831 84,807Non-financial assetsTerm depositsin gold 1,641 1,025in bank metals 1,853 1,921Total non-financial assets 3,494 2,946Total foreign currency funds and deposits 115,325 87,753

The amount of demand deposits includes balances on special purpose accounts totallingUAH 99 million (2007: UAH 83 million) maintained by the NBU under credit lines received frominternational financial institutions, UAH 14 million blocked under letters of credit payable and theUAH 8 million (2007: UAH 1 million) margin reserve for settlements under futures operationswithin the framework of Agreement on investment management and advisory services betweenthe International Bank for Reconstruction and Development and the NBU dated 1 November2006.

The term deposits denominated in bank metals include platinum and palladium deposits.These deposits and deposits of gold earn interest paid in USD.

All foreign currency funds and deposits were neither past due nor impaired at 31 December2008 and 31 December 2007. The foreign currency deposits are not collateralised.

All foreign currency funds and deposits are expected to be recovered within 12 monthsexcept for term deposits totalling UAH 1,645 million maturing later than in 12 months (2007:UAH 1,026 million).

The geographical analysis of the foreign currency funds and deposits is disclosed in Note28, credit risk analysis is disclosed in Note 29, currency risk analysis is presented in Note 30and interest rate risk analysis is presented in Note 31.

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Annual Repor t 2008

6. Foreign securitiesAs at 31 December 2008 the foreign securities include the following:

(in UAH millions)Government Corporate

securities securities Total

Debt securities at fair value through profit or loss by issuers:Coupon US Treasury bills denominated in US dollars 29,032 – 29,032Coupon UK Government bonds, denominated in British pounds: 16,359 – 16,359Other EU State bonds:denominated in US dollars 807 – 807denominated in Euro 48,391 – 48,391Bonds of Bank for International Settlements:denominated in US dollars – 1,035 1,035denominated in British pounds – 114 114denominated in Euro – 2,058 2,058Bonds of other issuers:denominated in US dollars 869 17,561 18,430denominated in British pounds – 5,140 5,140denominated in Euro – 5,496 5,496Total debt securities at fair value through profit or loss 95,458 31,404 126,862Equity securities available for sale:shares of Black Sea Trade and Development Bank – 120 120investment in Inter-State Bank – 1 1Total equity securities available for sale – 121 121Total foreign securities 95,458 31,525 126,983

All foreign debt securities were neither past due nor impaired at 31 December 2008 and 31December 2007.

Interest income earned on foreign debt securities included in results from operations withdebt securities at fair value through profit or loss in the consolidated income statement amount-ed to UAH 3,616 million in 2008 (2007: UAH 2,550 million).

All foreign securities are expected to be recovered within 12 months except for equity secu-rities available for sale totalling UAH 121 million (2007: UAH 121 million).

Bonds of other issuers include debt securities issued by foreign local governments, for-eign central and investment banks and other issuers. Government securities included inbonds of other issuers are represented by bonds issued by foreign local governments.Corporate securities included in bonds of other issuers include USD denominated bondsissued by Bank of England.

Information on nominal value, yield to maturity, coupon income and maturities of foreigndebt securities held by the NBU as at 31 December 2008, is presented in the table below:

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146

Annual Repor t 2008

Total nominal Total Yield to Cupon Frequency Maturityvalue nominal maturity, rate, of coupon

in currency, value in % p.a. % p.a. paymentsin millions hryvnia

equivalent,in UAH millions

Debt securities at fair value through profit or loss by issuers:Coupon US Treasury bills denominated in US dollars 3,514 27,058 0.20– 0.875– Every 6 From 15 days

1.54% 6.5% months to 5 yearsCoupon UK Government bonds, denominated in British pounds 1,357 15,117 0.59– 3.25– Every 6 From 2

2.74% 9% months monthsto 6years

Other EU State bonds:denominated in US dollars 100 770 1.703– 3.375– Every 6 Up to 2.5

2.767% 3.5% months yearsor annually

denominated in Euro 4,231 45,931 1.63– 2.5– Annually From 4 3.58% 6.5% days

to 5 yearsBonds of Bank for International Settlements:denominated in US dollars 130 1,001 1.69– 2.5– Every From 1 to

2.21% 3.88% 6 months 3 yearsdenominated in British pounds 10 111 2.187% 4.6% Every 2.5

6 months monthsdenominated in Euro 185 2,008 1.637– 3–4% Annually From 2.5

1.879% months to 1 year

Bonds of other issuers:denominated in US dollars 2,313 17,814 0.431– 0.42– Monthly, From 2121months or annually 5.52% 6% quarterly, days

every to 8 years6 months

or annuallydenominated in British pounds 436 4,853 1.32– 4.25– Every 6 From 2

3.81% 6.875% months monthsor annually to 4 year

denominated in Euro 498 5,406 1.871– 3-5.56% Quarterly From 6.56.483% or annually months

to 3 year

Information on nominal value, yield to maturity, coupon income and maturities of foreigndebt securities held by the NBU as at 31 December 2007, is presented in the table below:

Total nominal Total Yield to Cupon Frequency Maturityvalue nominal maturity, rate, of coupon

in currency, value in % p.a. % p.a. paymentsin millions hryvnia

equivalent,in UAH millions

Debt securities at fair value through profit or loss by issuers:Coupon US Treasury bills denominated in US dollars 4,879 24,638 3.01– 2.6255– Every 6 From 1

4.48% 6.25% months months to16 years

Coupon UK Government bonds, denominated in British pounds 1,235 12,467 4.30– 4–9% Every 6 From 2

4.92% months months to4.5 years

Other EU State bonds denominated in euro 2,269 16,838 3.8– 2.5– Annually From 4

4.6% 8.5% days to 3 years

Bonds of Bank for International Settlements:denominated in US dollars 299.5 1,512 3.825– 3–5% Every 6 From 2.5

4.509% months months toor annually 4 year

denominated in British pounds 144.5 1,459 5.061– 0–4.6% Every 6 From5.183% months months to

or at maturity 1 yeardenominated in Euro 165 1,224 4.351– 2.5–3.5% Every 6 From 1

4.526% months to 2 yearBonds of other issuers:denominated in US dollars 1,820 9,193 3.59– 2.375–7% Every 6 From 1.5

5.07% months months to 9 years

denominated in British pounds 454.5 4,589 4.62– 0–5.5% Annually From 8

5.68% months to5 years

denominated in Euro 471 3,495 4.08– 0– Annually From 3

5.0% 4.375% daysto 3 years

Shares of Black Sea Trade and Development BankInvestment into the share capital of Black Sea Trade and Development Bank (BSTDB) was

made in accordance with the Agreement on establishment of BSTDB dated 30 June 1994.As at 31 December 2008 the amount of the NBU's contribution to the share capital of BSTDB

was SDR 24 million (UAH 120 million at the official rate of hryvnia to SDR as at the date of acqui-sition) (2007: SDR 24 million or UAH 120 million). The NBU's share in the share capital of BSTDBwas 8% (2007: 8%).

Investment in Inter-State BankInter-State Bank (ISB) was established under a multi-lateral agreement of member countries of

the Commonwealth of Independent States in 1993. ISB is an international settlement and credit andfinance institution. The contribution of Ukraine to the share capital of ISB is UAH 1 million and theshare in equity equals 20.7%. The NBU does not have actual influence on decisions of ISB anddoes not earn income. The NBU categorised the investment in the share capital of ISB as an equi-ty instrument available-for-sale, which is stated at cost less impairment.

The NBU could not reliably estimate the fair value of its available-for-sale investments in shares

147


of the BSTDB and ISB. The investments are carried at cost of UAH 121 million (2007: UAH 121million). These investments were made by the NBU in performance of one of its functions as thecentral bank of Ukraine, i.e. represent Ukraine in those organisations where co-operation is per-formed at the level of central banks. The shares of these banks are not traded as these are spe-cialised international institutions. For the purposes of assessment of impairment of those equitysecurities for which the fair value cannot be reliably determined, the NBU has considered financialdata of the investees and the NBU's share in net assets. The NBU has no intention to dispose ofthese investments.

The geographical analysis of foreign securities is disclosed in Note 28, credit risk analysis fordebt securities is disclosed in Note 29, currency risk analysis is presented in Note 30, interest raterisk analysis is presented in Note 31.

As at 31 December 2007 foreign securities included the following:

(in UAH millions)Government Corporate

securities securities Total

Debt securities at fair value through profit or loss by issuers:Coupon US Treasury bills denominatedin US dollars 25,443 – 25,443Coupon UK Government bonds denominated in British pounds 12,823 – 12,823Other EU State bonds denominated in Euro 17,235 – 17,235Bonds of Bank for International Settlements:denominated in US dollars – 1,520 1,520denominated in British pounds – 1,446 1,446denominated in Euro – 1,219 1,219Bonds of other issuers:denominated in US dollars – 9,477 9,477denominated in British pounds – 4,671 4,671denominated in Euro – 3,481 3,481Total debt securities at fair value through profit or loss 55,501 21,814 77,315Equity securities available for sale:shares of Black Sea Trade and Development Bank – 120 120investment in Inter-State Bank – 1 1Total equity securities available for sale – 121 121Total foreign securities 55,501 21,935 77,436

7. State securities of Ukraine(in UAH millions)

2008 2007

State debt securities in national currency: Debt securities held to maturity:Promissory notes of the State Treasury of Ukraine 395 395Debt securities categorised as loans and receivables:Internal State debt securities 8,632 –Total State securities of Ukraine 9,027 395

In accordance with the Law of Ukraine "On the National Bank of Ukraine" the NBU performsoperations with State securities only on the secondary market.

As at 31 December 2008 the held-to-maturity debt securities denominated in national cur-rency held by the NBU represented the promissory notes of the State Treasury of Ukrainereceived by the NBU in September 2000 from the Ministry of Finance of Ukraine as a part ofthe restructuring of accrued income on domestic Government bonds due in 2000-2004. The

148

Annual Repor t 2008

total nominal value of the promissory notes amounts to UAH 395 million. The promissory notesof the State Treasury are non-interest bearing. Promissory notes of UAH 196 million arerepayable in 2009 with the balancing payment of UAH 199 million in 2010.

Debt securities classified as loans and receivables are represented by internal State debtsecurities ("OVDP") issued by the Ministry of Finance of Ukraine and purchased by the NBU inthe second half of 2008 from Ukrainian banks for the purposes of regulating their liquidity.OVDP have nominal value of UAH 1,000 each, yield to maturity from 6.38% to 16.09%, couponrate from 9.5% to 15.6% payable every 6 months or quarterly and maturity from 3 to 7 years.

All State debt securities were neither past due nor impaired at 31 December 2008 and 31December 2007.

All State debt securities of Ukraine are expected to be recovered after more than 12 monthsexcept for the promissory notes of the State Treasury of Ukraine and accrued interest on debtsecurities totalling UAH 384 million payable in 2009 (2007: all State debt securities expected tobe recovered after more than 12 months).

The credit risk analysis of State debt securities is disclosed in Note 29, currency risk analy-sis is disclosed in Note 30, interest rate risk analysis is presented in Note 31. Information on theestimated fair value of State securities of Ukraine is presented in Note 34.

8. Loans to banks and other borrowersLoans to banks and other borrowers by the purpose of their issue are classified as follows:

(in UAH millions)2008 2007

Loans granted to banks to support their liquidity:under financial recovery programs 35 600 –under repo agreements 12 590 –loans provided through tenders 12 518 1 401overnight 8 10other 99 155Loans granted under credit lines for support of small and medium enterprises from funds received from the European Bankfor Reconstruction and Development 295 301Other 217 149Provision for impairment of loans to banks and other borrowers (401) (324)Total loans to banks and other borrowers 60 926 1 692

Loans to banks to support liquidity (except for overnight loans) were collateralised by Statebonds of Ukraine, claims under agreements in respect of loans granted by banks to business-es and individuals, municipal bonds, corporate bonds, foreign currency deposits, shares ofbanks and other assets.

All loans to banks and other borrowers are maturing within 12 months except for long-termloans totalling UAH 99 million (2007: UAH 208 million).

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During the year ended 31 December 2007 movements in provision against loans to banksand other borrowers were as follows:

The loans to banks and other borrowers as at 31 December 2008 can be classified by cred-it quality as follows:

Credit risk analysis of the loans not overdue and not impaired is provided in Note 29.As at 31 December 2008 and 31 December 2007 all the impaired loans are past due over

360 days, except for the loan in the amount of UAH 58 million (2007: UAH 48 million) which wasrenegotiated after it became past due.

For the purposes of impairment calculations, the fair value of collateral for impaired loanswas assessed as zero due to problems with legal enforceability of the collateral.

The loans to banks and other borrowers as at 31 December 2007 can be classified by cred-it quality as follows:

150

Annual Repor t 2008

(in UAH millions)

Provision against loans to banks and other borrowers at the beginning of the year 17 161 146 324Increase in provision 18 71 89Loans written off against provision account – (12) – (12)Provision against loans to banks and other borrowers at the end of the year 17 167 217 401

Loans granted to banks to support

their liquidity

Loans granted under creditlines for support of small and

medium enterprises fromfunds received from the

European Bank forReconstruction and

Development:

Other Total

(in UAH millions)

Provision against loans to banks and other borrowers at the beginning of the year 17 166 151 334Reduction in provision – (2) (5) (7)Loans written off against provision account – (3) – (3)Provision against loans to banks and other borrowers at the end of the year 17 161 146 324


their liquidity




Development:

Other Total

(in UAH millions)

Neither past due nor impaired 60,799 127 – 60,926Impaired 17 167 217 401Provision against loans to banks and other borrowers (17) (167) (217) (401)Total loans to banks and other borrowers 60,799 127 – 60,926


their liquidity




Development:

Other Total

151


Information about the collateral provided for loans at 31 December 2008 is as follows:

Information about the collateral provided for loans at 31 December 2007 is as follows:

The geographical analysis of loans to banks and other borrowers is disclosed in Note 28,credit risk analysis is presented in Note 29, currency risk analysis is presented in Note 30 and

(in UAH millions)

Neither past due nor impaired 1,549 139 – 1,688Impaired loans 17 162 149 328Provision against loans to banks and other borrowers (17) (162) (145) (324)Total loans to banks and other borrowers 1,549 139 4 1,692


their liquidity




Development:

Other Total

(in UAH millions)

Loans secured by:Claims under loans agreements with customers 25,551 – – 25,551 Deposits placed with the NBU 83 – – 83State securities 14,381 – – 14,381 Corporate and municipal bonds 572 – – 572 Shares of banks provided by owners of significant interest 8,767 – – 8,767 Guarantees provided 8,896 – – 8,896Other assets 2,549 –155 2,704Unsecured loans 16 295 62 373Total loans to banks and otherborrowers (before provision) 60,815 295 217 61,327


their liquidity




Development:

Other Total

(in UAH millions)

Loans secured by:Claims under loans agreements with customers 1,327 – – 1,327Deposits placed with the NBU 138 – – 138State securities 73 – – 73Corporate and municipal bonds 1 – – 1Other assets – – 98 98Unsecured loans 27 301 51 379Total loans to banks and other borrowers (before provision) 1,566 301 149 2,016


their liquidity




Development:

Other Total

interest rate risk analysis is presented in Note 31. The estimated fair value of the loans to banksand other borrowers is presented in Note 34.

9. Internal State debt(in UAH millions)

2008 2007

Internal State debt in respect of loans to Government in national currency:

1994–1996 3 439 3 439Total internal State debt in national currency 3 439 3 439

Internal State debt in respect of loans to Government in foreign currency:

1995 3 949 2 7571996 3 757 2 464Total internal State debt in foreign currency 7 706 5 221

Provision against internal State debt in respect of loans to Government in national currency (69) (69)Provision against internal State debt in respect of loans to Government in foreign currency (727) (492)Total internal State debt 10 349 8 099

Loans in national currency and foreign currency were granted by the NBU in 1991-1996 forfinancing State budget deficits. Internal State debt is not collateralised. In accordance with theLaw on Restructuring, the loans in national currency granted in 1994-1996 totalling UAH 3,439million and loans granted in foreign currency totalling USD 1,001 million (UAH 7,706 million atthe exchange rate of hryvnia to USD as at 31 December 2008) were restructured and includedin the internal State debt.

In accordance with the Law, the amount of internal State debt in foreign currency was sup-posed to be repaid in equal quarterly instalments starting from 2002 to 2009. Had the repay-ment of internal State debt in foreign currency followed the repayment schedule envisaged bythe Law on Restructuring, the principal amount of internal State debt in foreign currency as at31 December 2008 would have been lower by USD 853 million or UAH 6,567 million at theexchange rate of hryvnia to USD as at 31 December 2008 (2007: lower by USD 738 million orUAH 3,727 million at the exchange rate of hryvnia to USD as at 31 December 2007).

In accordance with the Law, the amount of the internal State debt of Ukraine in respect ofthe loans granted in 1994-1996 in the national currency, is due to be repaid by equal quarterlyinstalments, with an interest payment of 5% per annum for debt servicing, from 2010 to 2035.However, the Law does not clearly state the period of interest accrual. As such, the interestincome on loans to Government in the national currency is not recognised in the statement ofincome.

During 2008 in accordance with the Law of Ukraine on State budget of Ukraine for 2008, apart of the debt in respect of the loans in foreign currency totalling USD 33 million (UAH 255million at the official exchange rate at the date of payment) was repaid (2007: a part of the debtwas repaid in respect of the loans in foreign currency totalling USD 50 million or UAH 253 mil-lion at the official exchange rate at the date of payment).

The Law of Ukraine on State budget of Ukraine for 2009 provides for restructuring in 2009of the balance of debt of the Government to the NBU defined in the Law on Restructuring,through issue of internal State bonds to be transferred to the NBU, however terms and condi-tions of these bonds are not specified. The Law on Restructuring does not provide for paymentof interest on the loans to Government in foreign currency included in the internal State debt.As a result, no interest income is recognised in the statement of income.

Movements in the provision against internal State debt in respect of the loans toGovernment were as follows:

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Annual Repor t 2008


Provision against internal State debt in respect of loans to Government at the beginning of the year 561 518Provision for loans to Government in foreign currency during the year 235 172Loans to Government in national currency written off against provisions – (129)Provision against internal State debt in respect of loans to Government at the end of the year 796 561

In accordance with the Law on Restructuring, in 2000 the NBU raised a provision of 2% ofthe amount outstanding in respect of the loans to Government in the national currency grantedin 1994–1996. Starting from 2001, the Laws of Ukraine on the State budget of Ukraine for2001– 2008 have suspended this requirement in respect of provisioning.

During the year ended 31 December 2008 under the decision of the NBU Board asapproved by the NBU Council, the NBU raised provisions against internal State debt in respectof the loans granted to Government in foreign currency totalling UAH 235 million (2007: UAH172 million).

All internal State debt is expected to be recovered after more than 12 months (2007: allinternal State debt was expected to be recovered after more than 12 months except for UAH255 million).

The currency risk analysis of internal State debt is disclosed in Note 30 and interest raterisk analysis is presented in Note 31. Estimated fair value of internal State debt is disclosed inNote 34.

10. IMF quota contributionsThe quota balance represents Ukraine's subscription as a member of the IMF. Quotas vary

based on the economic size of each country and are determined by the Board of Governors ofthe IMF. The quota determines a member's voting power in the Fund, the limits of access to thefinancial resources of the Fund and a participant's share in the allocation of SDRs, the Fund'sunit of account. The major part of Ukraine's quota was paid in the form of non-interest-bearingpromissory notes issued to the IMF, the remainder being credited to IMF accounts No 1 and No2 (Note 16). As at 31 December 2008 Ukraine's quota in the IMF amounted to SDR 1,372 mil-lion or UAH 16,272 million at the year-end official exchange rate of hryvnia to SDR (2007: SDR1,372 million or UAH 10,949 million at the year-end official exchange rate of hryvnia to SDR).The quota does not earn interest and is non-current asset.

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11. Fixed assets and intangible assets

During 2007 the NBU performed revaluation of premises and constructions to adjust the netbook value (carrying value) of the assets included in this category, to their fair value. The reval-uation was performed based on the reports of independent appraisers, who hold the relevantprofessional qualifications and who have recent experience in valuation of the assets of similarcategory. The basis used for the appraisal of the major part of the NBU's premises and con-structions was the comparative sales method. For the specialised premises or premises that arearchitectural monuments, the basis used for valuation was the depreciated replacement cost orincome capitalisation method.

The NBU management believes that during 2008 there was no significant changes in fairvalue of the NBU's premises and constructions.

The carrying amount of fixed assets includes the revaluation surplus of UAH 4,001 million(2007: UAH 4,005 million).

At 31 December 2008 fixed assets and intangible assets included the assets totalling UAH443 million at cost or valuation, which had been fully depreciated (2007: UAH 348 million).These assets are still used by the NBU.

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Annual Repor t 2008

Buildings Motor Machinery Fixtures Other Construction Intangibleand vehicles and and fixed in progress assets Total

constructions and equipment fittings assetstransport

Cost or valuation at 1 January 2007 1 632 85 911 82 102 57 58 2 927Accumulated depreciation as at 1 January 2007 89 39 534 50 56 – 40 808Net book value at1 January 2007 1 543 46 377 32 46 57 18 2 119Additions 70 42 155 7 26 67 11 378Disposals (30) – (1) – – – – (31)Transfer to other category: 18 – 10 – (5) (23) – –Revaluation 3 248 – – – – – – 3 248Depreciation (amortisation) charge for the year (49) (10) (111) (8) (34) – (10) (222)Net book value at31 December 2007 4 800 78 430 31 33 101 19 5 492

Cost or valuation at 31 December 2007 5 151 122 1 057 89 111 101 69 6 700Accumulated depreciation as at 31 December 2007 351 44 627 58 78 – 50 1 208Net book value at31 December 2007 4 800 78 430 31 33 101 19 5 492

Additions 42 8 127 24 26 136 32 395Disposals (22) – (1) – – – – (23)Transfer to other category: 31 – 17 2 28 (79) 1 –Revaluation (3) – – – – – – (3) Depreciation (amortisation) charge for the year (129) (13) (109) (7) (27) – (8) (293)Cost or valuation at 31 December 2008 5 181 125 1 182 113 156 158 101 7 016Accumulated depreciation as at 31 December 2008 462 52 718 63 96 – 57 1 448Net book value at31 December 2008 4 719 73 464 50 60 158 44 5 568

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12. Other assets(in UAH millions)

2008 2007

Other financial assetsAccounts receivable – neither past due nor impaired 219 113Accounts receivable – impaired 1 2Provision against other financial assets (1) (1)Total other financial assets 219 114

Other non-financial assetsBank metals 351 467Inventory 274 178Prepayments 330 82Precious metals and jewellery 62 58Investments in associates 90 46Non-current assets held for sale 51 30Commemorative coins, souvenirs and other products 31 12Provision against other non-financial assets (5) (6)

Total other non-financial assets 1,184 867Total other assets 1,403 981

Other financial assets are not collateralised.Other non-financial assets include non-current assets (buildings and constructions) totalling

UAH 51 million, in which respect the decision was taken on their disposal. The carrying valueof these assets does not exceed their fair value less costs to sell.

Movements in the provision against other assets were as follows:(in UAH millions)

2008 2007

Provision against other assets at the beginning of the year 7 7Recovery of provision during the year (Note 26) (1) –

Provision against other assets at the end of the year 6 7

At 31 December 2008 investments in associates included the following:(in UAH millions)

2008 2006Name Country of Type Carrying Share Carrying Share

registration of activity amount (%) amount (%)

German-Ukrainian Fund Ukraine Financial institution 69 31,25 46 31,25

of special type

OJSC "All-Ukrainian Depository of Securities" Ukraine Depositary 21 25,00 – –ïàïåð³â" activitiesTotal 90 46

German-Ukrainian Fund (GUF) was established by the Cabinet of Ministers of Ukraine rep-resented by the Ministry of Finance, the NBU and Kreditanstalt fur Wiederaufbau (KfW).According to the Charter, the GUF does not have an objective of generating profit. The profit ofGUF is allocated to increase the lending pool for SME.

Open Joint-Stock Company "All-Ukrainian Depository of Securities" (the "Depository") wasestablished by the NBU, banks and other financial institutions of Ukraine. In accordance withthe Charter, the Depository was established to carry out business activities relating to securi-ties custody, recording, accounting, clearing and settlements and conducting other operationsprovided by Ukrainian legislation in respect of depository activities.

Allocation of profits earned by the Depository is determined by general shareholders meet-

ing. Net profit is allocated to development of the Depository activities, improvement of its tech-nological and organisational processes, creating and increasing reserve funds etc.

Movements in the investments in associates were as follows:(in UAH millions)

2008 2007

Carrying amount of investments at the beginning of the year 46 29NBU's contribution into associates 20 –Share of the NBU in profits 1 2Foreign currency revaluation 23 15Carrying amount of investments at the end of the year 90 46

Information on total assets and liabilities of the associates as at 31 December 2008 andtheir revenues and profits for the year ended 31 December 2008 is provided below


Total assets 316 171Total liabilities 38 24Total revenue 31 9Total expense 26 1Net profit for the year 5 8

All other assets are expected to be recovered within 12 months except for long-term receivables,bank metals and investments in associates totalling UAH 602 million (2007: UAH 624 million).

The geographical analysis of the other financial assets is disclosed in Note 28, credit riskanalysis is disclosed in Note 29 and currency risk analysis is presented in Note 30.

13. Accounts of banks(in UAH millions)

2008 2007

Correspondent accounts:in national currency 18,622 19,050in foreign currency 5 3Term deposits:in national currency 84 139Accounts of banks with special use conditions:in national currency 192 149in foreign currency 1 76Total accounts of banks 18,904 19,417

Correspondent accounts in national currency include mandatory reserves of banks with theNBU. As at 31 December 2008 the mandatory reserve balance was calculated on the basis ofa simple average over a monthly period (as at 31 December 2007: simple average over amonthly period) and should be maintained at a level of 0 to 5 per cent (31 December 2007: 0.5to 5 per cent) of certain obligations of banks. In accordance with the NBU regulations, as at 31December 2008, banks were required on a daily basis to maintain on the correspondentaccount with the NBU at least 90 per cent of the amount of mandatory reserves for the pre-ceding "reserve" period, i.e. for the preceding month (as at 31 December 2007: 100%). The cor-respondent accounts are non-interest bearing.

Term deposits in national currency include the funds placed by banks with the NBU as col-lateral against the refinancing loans received from the NBU.

Accounts of banks with special use conditions include the funds placed for the purposes ofstatutory capital formation of newly established banks in the process of registration, accountsfor settlements of liquidation committees of banks under the process of liquidation and accounts

156

Annual Repor t 2008

opened for other purposes provided in the law of Ukraine and the NBU regulations.All accounts of banks are maturing within 12 months (2007: all within 12 months).The geographical analysis of the accounts of banks is disclosed in Note 28, currency risk

analysis is presented in Note 30, interest rate risk analysis is presented in Note 31 and liquidi-ty risk analysis is disclosed in Note 32.

14. Accounts of state and other institutions(in UAH millions)

2008 2007

Budget funds 12 917 15 328Other 99 110Total accounts of State and other institutions 13 016 15 438

The NBU services the accounts of the State budget of Ukraine and local budgets consoli-dated under one treasury account.

In accordance with the Law of Ukraine "On the National Bank of Ukraine" all budgetaccounts are non-interest bearing.

Accounts of other institutions include balance of UAH 9 million on account of the CorporateNon-State Pension Fund of the NBU (31 December 2007: UAH 54 million) (refer to Note 24).

All accounts of State and other institutions are maturing within 12 months (2007: all within12 months).

The geographical analysis of accounts of State and other institutions is disclosed inNote 28, currency risk analysis is presented in Note 30, interest rate risk is disclosed in Note 31and liquidity risk analysis is disclosed in Note 32.

15. Deposit certificates issued by the NBU The deposit certificate issued by the NBU is one of its monetary policy instruments. This is

a debt security issued by the NBU in non-documentary form evidencing placement of banks'funds with the NBU and the right of banks to receive at maturity the funds placed together withaccrued interest.

Transactions with placement of the deposit certificates are performed under agreementswith banks for the term of one day (overnigh posits), up to 14 days and up to 365 days(2007: up to 14 days and up to 365 days).

As at 31 December 2008 the nominal value of deposit certificates issued by the NBU wasUAH 1 million each, the initial term of placement from 5 to 15 days, and weighted average inter-est rate was 19.2% per annum (2007: weighted average interest rate of 3.8% per annum andthe initial term of placement from 6 to 270 days). The weighted average interest rate for thedeposit certificates placed during 2008 was 3.7% per annum, and the initial term of placementvaried from 2 to 90 days (2007: weighted average interest rate of 0.7% per annum and initialterm of placement from 1 to 270 days).

All deposit certificates issued by the NBU are maturing within 12 months (2007: all within12 months).

The currency risk analysis of the deposit certificates is disclosed in Note 30, interest raterisk analysis is presented in Note 31 and liquidity risk analysis is disclosed in Note 32.

16. Liabilities to the IMF(in UAH millions)

2008 2007

IMF accounts No 1 and No 2 41 28Liabilities to the IMF in settlement of Quota 16,231 10,921Liabilities to the IMF in respect of purchases of SDR 36,377 2,197Total liabilities to the IMF 52,649 13,146

157


158

Annual Repor t 2008

Liabilities to the IMF include the liability of the Ministry of Finance of Ukraine to the IMF insettlement of quota contribution totalling UAH 2,511 million (2007: UAH 2,511 million).

During 2008 the liabilities to the IMF increased as a result of receipt in November 2008 ofthe first tranche of SDR 3 billion (UAH 24,600 million at the annual IMF exchange rate or UAH25,948 million at the official exchange rate at the date of receipt) in accordance with the agree-ment between Ukraine and the IMF under stand-by facility totalling SDR 11 billion.

During 2008 there was a repayment of IMF funds of SDR 216 million (UAH 1,737 million atthe official exchange rate at the date of payment) (2007: SDR 279 million or UAH 2,157 millionat the official exchange rate at the date of payment).

All liabilities to the IMF are non-current except for IMF accounts No 1 and No 2 and a part of lia-bilities to the IMF in respect of purchases of SDRs totalling UAH 797 million (2007: UAH 1,740 million).

The interest rate risk analysis of liabilities to the IMF is presented in Note 31 and liquidityrisk analysis is disclosed in Note 32.

17. Other liabilities(in UAH millions)

2008 2007

Other financial liabilitiesCurrent accounts of employees 465 305Accounts payable 52 30Other 3 –

Total other financial liabilities 520 335Other non-financial liabilities

Taxes payable 5 5Deferred income 6 7

Total other non-financial liabilities 11 12Total other liabilities 531 347

All other liabilities are current except for UAH 6 million (2007: all current except for UAH 2 million).Geographical analysis of the other financial liabilities is provided in Note 28, currency risk

analysis is provided in Note 30 and liquidity risk analysis is provided in Note 32.

18. Profits payable to State BudgetIn accordance with the Law of Ukraine "On the National Bank of Ukraine", the NBU is

obliged to distribute the excess of budgeted income over budgeted expenditure to the Statebudget of Ukraine based on the results for the preceding year. Budgeted expenditure shouldensure the NBU's ability to exercise its functions and includes both expenses presented in thestatement of income and expenditures for financing capital investments and formation of funds.The amount of profit payable to the State budget is calculated as the amount of profit earnedless the funds used for financing capital investments and formation of funds.

The actual excess of budgeted income over budgeted expenditure for the year ended 31December 2008 amounted to UAH 7,955 million (2007: UAH 4,834 million).

The calculation of the profit payable to the State budget of Ukraine is presented below:(in UAH millions)

2008 2007

Profit available for distribution per the statement of income 9,347 5,635

Allocation to funds of the NBU (457) (148)Allocation to general reserves of the NBU (897) (453)Allocation to statutory capital of the NBU – (90)Retained earnings (38) (110)

Excess of budgeted income over budgeted expenditure for the year to be transferred to the State budget, including: 7,955 4,834Advance payment of profits to the State budget (3,500) –Profits payable to the State Budget 4,455 4,834

During 2008 the NBU transferred to the State budget of Ukraine the remaining amount ofUAH 4,834 million of the excess of budgeted income over budgeted expenditure for the yearended 31 December 2007. Profits payable to the State budget are to be settled within 12 months.

19. Management of capitalCapital of the NBU comprises the residual value of the NBU's assets after deduction of its

liabilities. No external capital requirements exist for the NBU as the central bank, except for the size

of the statutory capital stipulated by the Law of Ukraine "On the National Bank of Ukraine" (the"Law"). The Law does not contain specific provisions defining the NBU's recapitalisation in theevent of loss of capital as a result of revaluation of international reserves.

In accordance with this Law the amount of statutory capital of the NBU shall be UAH 10 mil-lion. The amount of statutory capital may be increased under the decision of the NBU Council.

In accordance with this Law, formation of the NBU's statutory capital, general reserves andother funds is to be from profits of the NBU under decisions of the NBU Council.

Based on the results for the year ended 31 December 2007 the NBU Council approvedincrease in the statutory capital of the NBU to UAH 100 million.

The NBU's objectives when managing capital are to maintain an appropriate level of capi-tal to ensure economic independence of the NBU and ability to perform its functions. The NBUconsiders total capital under management to be equity as shown in the consolidated balancesheet. The amount of capital that the NBU managed as of 31 December 2008 was UAH 89,971million (2007: UAH 16,360 million).

Objectives and policies of managing components of the NBU's capital are defined by therespective internal regulations approved by the decisions of the NBU Council and the NBUBoard. Formation of funds and reserves of the NBU for covering financial risks associated withperformance of its functions, is carried out in accordance with the regulations approved y theNBU Council.

General reserves are formed to cover general risks (potential losses) arising as a result ofbanking operations. The maximum amount of these reserves is limited by 2 per cent of theamount of international reserves. Annual allocation of profit for formation (increase) of the gen-eral reserves, is defined at a level of 10 per cent of the profit available for distribution.

The amount of profit allocated for formation of the NBU funds for the purposes of coveringinvestments into acquisition, construction, improvement of non-current tangible and intangibleassets and covering social needs of the NBU employees, is defined within the limits providedin the NBU budget under the respective headings.

The composition of the NBU capital as at 31 December 2008 is presented below:(in UAH millions)

2008 2007

Statutory capital 100 100Funds of the NBU 2,301 1,844General reserves 1,506 499Retained earnings 54 125Revaluation reserve for foreign currency, monetary gold and bank metals 82,009 9,787Revaluation reserve for fixed assets 4,001 4,005Total capital 89,971 16,360

159


20. Cash and cash equivalents(in UAH millions)

Ïðèì³òêè 2008 2007

Foreign currency cash 5 90 76Demand deposits (excluding restricted funds) 5 21,470 2,325Short-term deposits maturing within three months (excluding gold, bank metals and restricted funds) 55,870 29,726SDR holdings 66 14Demand accounts of banks 13 (18,821) (19,278)Accounts of State and other institutions 14 (13,016) (15,438)IMF accounts No 1 and No 2 16 (41) (28)Current accounts of employees 17 (465) (305)Other (3) –Total cash and cash equivalents 45,150 (2,908)

21. Interest income and expense (in UAH millions)

2008 2007

Interest incomeIncome on foreign currency funds and deposits 3,527 3,524Income on loans to banks and other borrowers 1,460 116Income on State securities of Ukraine 148 –Income on SDR Holdings 1 1Other 3 2Total interest income 5,139 3,643Interest expenseExpense on operations with the IMF (158) (173)Expense on deposit certificates issued by the NBU (92) (29)Expense on accounts of banks (11) (7)Other (93) (53)Total interest expense (354) (262)Net interest income 4,785 3,381

Other interest expense includes expenses on loans received, expenses on accounts ofState and other institutions and expenses on accounts of employees.

During 2008 the interest received and interest paid which are included in cash flows fromoperating activities in the consolidated statement of cash flows, amounted to UAH 8,622 million(2007: UAH 5,506 million) and UAH 268 million (2007: UAH 270 million) respectively.

22. Fee and commission income and expense(in UAH millions)

2008 2007

Fee and commission incomeIncome on cash and settlement services 205 100Income on operations with financial instruments 150 10Income on services of electronic payments system and electronic mail 148 134Income on valuables transportation services 9 22Total fee and commission income 512 266Fee and commission expenseExpense on operations with the IMF (129) –Expense on operations with financial instruments (7) (5)Total fee and commission expense (136) (5)Net fee and commission income 376 261

160

Annual Repor t 2008

23. Other income(in UAH millions)

2008 2007

Income from sale of commemorative coins, souvenirs and other products 99 73Realized and unrealized gains on transactions with derivatives 41 –Income from activities of educational institutions 22 19Income from registration and licensing 5 5Fines and penalties received 4 3Income from monitoring of credit lines 3 2Gain from disposal of fixed assets 1 2Other 58 36Total other income 233 140

The other income for 2008 includes UAH 40 million credited to Ukraine's holding account inaccordance with the decision of the IMF Executive Board. The remaining other income includesincome from investments in associates, income from social and consumer services, sales ofprinted materials, sale of inventory and software maintenance.

24. Staff costs(in UAH millions)

2008 2007

Wages and salaries 530 378Social assistance and other social payments 265 197Mandatory State pension scheme contributions 221 165Social security contributions 27 22Contributions to the Corporate Non-State Pension Fund of the NBU 91 54Other 40 16Total staff costs 1 174 832

The other staff costs include staff training costs, expenditure for special clothes, footwearand other means of protection, the NBU employees housing expenses and other costs.

The Corporate Non-State Pension Fund of the NBU is a defined contribution pension planand after transfer of respective funds the NBU does not incur liabilities in respect of benefitspayments. Upon retirement of the NBU employees, all benefits are paid by the Corporate Non-State Pension Fund of the NBU.

25. Administrative and other expenses(in UAH millions)

2008 2007

Depreciation and amortisation 222 146Expenses for maintenance of fixed assets and intangible assets 64 58Utilities and household expenses 63 49Fines and penalties paid 12 10Telecommunication services and maintenance 11 10Business trip expenses 10 10Other administrative services 8 4Expenses for administration of international credit lines 5 4Taxes, duties and charges 4 2Stationery 2 2Other 43 32Total administrative and other expenses 444 327

161


162

Annual Repor t 2008

The depreciation charge for 2008 excludes depreciation of UAH 71 million (2007: UAH 76million) in respect of the fixed assets used in the production of banknote paper, banknotes,coins and other products. This part of the depreciation charge is included in the expenses forproduction of banknotes, coins and other products (refer to Note 2).

The other expenses include expenses for purchase of exhibits for the museums, post andmail, stationery, representation, audit, marketing and advertising, sponsorship and otherexpenses, etc.

26. Net increase in provisions(in UAH millions)

Notes 2008 2007

(Increase)/decrease in provisions:against internal State debt 9 (235) (172)against loans to banks and other borrowers 8 (89) 7against other assets 12 1 –Total net increase in provisions (323) (165)

27. Financial risk managementRisk management objectives of the NBU are as follows:ensuring that the NBU's risks are kept at a secure level on a continuous basis;ensuring effective management of assets and liabilities of the NBU, in particular prevention

of inadequate use of funds;ensuring maintenance of the necessary level of liquid assets of the NBU;compliance with limits set by the legislation, as well as with principles, internal rules, pro-

cedures and limits defined by the NBU regulations, during the process of assets and liabilitiesmanagement;

timely provision of the NBU's management with adequate information (reports) on risk man-agement positions in respect of assets and liabilities of the NBU.

Main principles of financial risk management of the NBU are as follows:financial risk management is aimed at full avoidance or minimisation of the impact of risks

attributable to assets and liabilities of the NBU, with taking into account the NBU's risk appetitedefined by the legislation and the NBU regulations;

acceptable level of financial risks of the NBU is defined by the NBU Board and Assets andLiabilities Management Committee;

control over compliance with the acceptable level of financial risks of the NBU is exercisedby management of the structural divisions of the NBU and Risk Control Division of the NBU.

Financial risk management of the NBU is carried out through setting quantitative limits andqualitative restrictions and conditions as provided by the NBU regulations. Monthly reports oncompliance with these limits and restrictions are prepared by the Risk Control Division and sub-mitted to the NBU's management.

Principal types of the financial risks inherent in the NBU's activities are credit, currency,interest rate and liquidity risk.

Credit risk. Credit risk is the risk to incur losses as a result of counterparty failing to per-form its financial liabilities to the NBU.

Credit risk is inherent to the operations of the NBU with funds of international reservesthrough placement of the funds on demand accounts and term deposits with foreign banks,investments into foreign securities denominated in foreign currencies, and lending to banks andother borrowers.

The NBU's maximum exposure to credit risk is reflected in the carrying amounts of finan-cial assets on the balance sheet.

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Credit risk management is performed at the NBU through the following actions:defining the minimum acceptable credit ratings of counterparties;setting the long-term credit limits for funds placements by counterparty bank and security issuer;setting the short-term credit limits on total exposures to counterparty banks;setting the limits on standard duration (average maturity) level for placements of funds by

currency and type of financial instrument;performing operations on open markets through secured lending and repo and swap operations;monitoring of participating banks' compliance with eligibility criteria defined by respective

credit line agreements;monitoring creditworthiness of counterparty banks.Geographical analysis of the NBU's placements (Note 28) shows that during the year ended

31 December 2008 the amount of the NBU's financial assets placed with counterparties inOECD countries, decreased from 88% as at 31 December 2007 to 71% as at 31 December2008, first of all as a result of increase in the share of financial assets placed in Ukraine.

Currency risk Currency risk is the risk of incurring losses as a result of unfavourable changes in exchange

rates of hryvnia to foreign currencies.The NBU is exposed to the currency risk through existence of open currency positions in

the balance sheet due to management of the international reserves.The level of currency risk of the NBU was assessed using Value-at-Risk (VaR) method by cal-

culating the risk value of open currency position of the balance sheet and international reservesas possible change in their UAH equivalent with 95% probability in one business day, ten busi-ness days and one month horizon. The model of the Value-at-Risk method applied by the NBUtakes into account the correlation between exchange rates of hryvnia to different foreign curren-cies and hryvnia prices of the monetary gold and bank metals which are treated as componentsof the open currency position of the balance sheet and international reserves, and is based onvolatilities of the components calculated for the period from July 2000 to December 2008.

During the year ended 31 December 2008 the risk value of open currency position of thebalance sheet increased from 0.51% of UAH equivalent of the open position (4.69% of equity)as at 31 December 2007 to 0.69% (1.64% of equity) as at 31 December 2008 at one-day hori-zon, from 1.63% (15.16% of equity) as at 31 December 2007 to 3.28% (7.78% of equity) asat 31 December 2008 at ten-days horizon and from 2.24% (20.81% of equity) as at 31December 2007 to 4.58% (10.85% of equity) as at 31 December 2008 at one-month horizon.

The above increase in risk value of open currency position of the NBU in percentage termsarises due to noticeable increase in volatility of hryvnia value of international reserves in US dol-lars as a result of devaluation of the official exchange rate of hryvnia to USD in October-December 2008. Relative share of risk value of open currency position as a percentage of equi-ty decreased as a result of significant increase of the NBU's equity during the year ended 31December 2008.

During the process of risk value assessment of the open currency position of the balance sheetand international reserves, in 2008 the NBU performed monthly analysis of the level of impact ofspecific currency positions on formation of the risk value, as well as changes in amounts andexchange rates of specific currencies, volatility of the exchange rates, correlation of fluctuations ofthe exchange rates, ratio of the currencies with high volatility and low volatility against hryvnia.

For the purposes of analysing possible future levels of the currency risk the NBU performedstress-testing to investigate the level of impact of possible financial market turbulence on thevalue of international reserves of the NBU as a result of crisis situations.

Currency risk is managed through defining the standard currency composition of the NBU'sinternational reserves as a range of allowed shares of each currency within the NBU's interna-tional reserves. Compliance with approved composition and limits is monitored using monthlyreports prepared by Risk Control Division of the NBU. These reports are submitted to and

reviewed by the top management of the NBU.Interest rate riskInterest rate risk is the risk of incurring losses as a result of unfavourable changes in inter-

est rates. During the year ended 31 December 2008 the interest rate risk of the NBU first of all was

defined through sensitivity of the market value of foreign securities representing a part of theinternational reserves, to changes in the interest rates. In order to limit the interest rate risk,the NBU managed its securities portfolio in relation to standard indicators, such as securi-ties indices defined separately for securities portfolio in each currency, and modified dura-tion indicators.

The modified duration of the securities portfolio characterizes a degree of influence of themarket interest rate change on the change of the market value of the portfolio.

During 2008 the modified duration of the foreign currency denominated securities portfo-lio increased from 1.685 (UAH 13.04 million per one basis point) as at 31 December 2007 to1.818 (UAH 23.54 million per one basis point) as at 31 December 2008, which was deemedto be appropriate due to the increase in the amount of international reserves and expecta-tions of a decrease in the market interest rates in 2008. In particular, if the market interestrates for US Dollars, Euro and British pounds had been 100 basis points higher/ lower withthe composition of the foreign securities portfolio held constant, the market value of foreignsecurities would have been UAH 2,354 million lower/ higher which would result in the respec-tive decrease/ increase in profit and equity (2007: if market interest rates for US Dollars, Euroand British pounds had been 100 basis points lower, the market value of foreign securitieswould have been UAH 1,304 million higher which would result in the respective increase inprofit and equity).

Other methods of assessing the level of the NBU's interest rate risk used during the report-ing period, were analysis of changes in weighted average multi-currency interest margin(spread) between interest rates on assets and liabilities of the NBU, as well as interest raterepricing analysis of the assets and liabilities.

Reports with analysis of modified duration, changes in interest margin and interest raterepricing of the assets and liabilities are prepared on a monthly basis by the Risk ControlDivision of the NBU. These reports are submitted to and reviewed by the top management ofthe NBU.

Liquidity risk. The liquidity risk is defined as the risk when an entity has no usable funds for servicing cur-

rent liabilities. The NBU's management of the liquidity risk inherent to operations with the international

reserves and arising to a significant extent due to volatility in levels of interventions on the inter-nal currency market, envisages four levels of liquidity support as follows:

maintaining certain levels of the international reserve assets in the form of cash on nostroaccounts (in accordance with the minimum required and maximum allowed daily levels of cashon the NBU's nostro accounts in foreign currencies, defined by respective NBU regulations);

availability of highly liquid securities within the international reserves (by major currencies)with the share of each type of securities not exceeding the levels defined by respective NBUregulations;

ensuring that the funds placed on term deposits and invested in securities mature evenly;ensuring possibility to perform conversion operations in case of necessity to use liquid

assets in one currency for compensating lack of liquidity in another currency.Liquidity risk is managed through monitoring of compliance with the minimum and maximum

requirements to liquidity of the international reserves defined in the Investment declaration.Detailed analysis of exposures to the above risks is disclosed in Notes 28 to 32.

164

Annual Repor t 2008

165


28. Geographical analysis of financial assets and liabilities The geographical analysis of the NBU's financial assets and liabilities as at 31 December

2008 is set out below:(in UAH millions)

Ukraine OECD IMF Other Totalcountries

Financial assetsForeign currency funds and deposits 90 111,741 – – 111,831Foreign securities – 126,379 – 604 126,983SDR Holdings – – 66 – 66State securities of Ukraine 9,027 – – – 9,027Loans to banks and other borrowers 60,926 – – – 60,926Internal State debt 10,349 – – – 10,349IMF Quota contributions – – 16,272 – 16,272Other financial assets 165 – 54 – 219Total financial assets 80,557 238,120 16,392 604 335,673Financial liabilitiesBanknotes and coins in circulation 167,538 – – – 167,538Accounts of banks 18,904 – – – 18,904Accounts of State and other institutions 13,016 – – – 13,016Deposit certificates issued by the NBU 2,809 – – – 2,809Loans received – 124 – – 124Liabilities to the IMF – – 52,649 – 52,649Other financial liabilities 490 30 – – 520Total financial liabilities 202,757 154 52,649 – 255,560Net balance sheet position (122,200) 237,966 (36,257) 604 80,113Off-balance sheet commitmentsCommitments to extend credit 2,649 – – – 2,649Net off-balance sheet position (Note 33) 2,649 – – – 2,649Net position (124,849) 237,966 (36,257) 604 77,464

The geographical analysis of the NBU's financial assets and liabilities as at 31 December2007 is set out below:

(in UAH millions)Ukraine OECD IMF Other Total

countries

Financial assetsForeign currency funds and deposits 77 84,730 – – 84,807Foreign securities – 77,368 – 68 77,436SDR Holdings – – 14 – 14State securities of Ukraine 395 – – – 395Loans to banks and other borrowers 1,692 – – – 1,692Internal State debt 8,099 – – – 8,099IMF Quota contributions – – 10,949 – 10,949Other financial assets 114 – – – 114Total financial assets 10,377 162,098 10,963 68 183,506Financial liabilitiesBanknotes and coins in circulation 122,471 – – – 122,471Accounts of banks 19,417 – – – 19,417Accounts of State and other institutions 15,438 – – – 15,438Deposit certificates issued by the NBU 3,117 – – – 3,117Loans received – 156 – – 156Liabilities to the IMF – – 13,146 – 13,146Other financial liabilities 321 14 – – 335Total financial liabilities 160,764 170 13,146 – 174,080Net balance sheet position (150,387) 161,928 (2,183) 68 9,426Off-balance sheet commitmentsCommitments to extend credit 1 – – – 1Net off-balance sheet position (Note 33) 1 – – – 1Net position (150,388) 161,928 (2,183) 68 9,425

166

Annual Repor t 2008

29. Credit riskFinancial assets of the NBU are classified by the lowest out of the ratings assigned to the

NBU's counterparties by the international rating agencies Fitch IBCA, Moody's and Standard &Poor's. The ratings are listed below as per the coding of rating agency Fitch IBCA using the rat-ing correspondence table of Bloomberg information system. Rating ÀÀÀ+ is the rating used foridentification of highly reliable international financial institutions such as the Bank forInternational Settlements.


Credit Amount % in Amount % inrating financial financial

assets assets

Financial assets – neither past due nor impaired Foreign currency funds and deposits– demand deposits AAA+ 40 0.0 16 0.0

AAA 14,365 12.8 23 0.0ÀÀ 13 0.0 1,299 1.6ÀÀ– 6,943 6.2 617 0.7À+ 162 0.1 453 0.5A 68 0.1 – –

– term deposits AAA+ 4 0.0 1 0.0AAA 7,697 6.9 3,055 3.6ÀÀ+ 4,106 3.7 2,744 3.2AA 26,390 23.6 46,116 54.4ÀÀ– 15 544 13.9 19,746 23.3À+ 26 254 23.5 9,562 11.3A 10,155 9.1 1,099 1.3

– foreign currency cash No risk 90 0.1 76 0.1Total foreign currency funds and deposits 111,831 100.0 84,807 100.0Foreign securities– Government bonds AAA 91,087 71.8 54,086 70.0

AA+ 3,103 2.4 1,415 1.8AA 869 0.7 – –A+ 400 0.3 – –

– Corporate securities AAA+ 3,206 2.5 4,185 5.4AAA 18,878 14.9 13,655 17.7AA+ 2,363 1.9 1,092 1.4AA 716 0.6 85 0.1AA– 4,692 3.7 2,082 2.7A+ 778 0.6 463 0.6À 770 0.6 252 0.3

Total foreign debt securities 126,862 100.0 77,315 100.0State securities of Ukraine B+ 8,632 100.0 – –Loans to banks and other borrowers:– loans granted to banks to support their liquidity B+ 500 0.8 – –

B 33,381 54.8 305 18.1B– 4,271 7.0 254 15.0ÑÑÑ 16,729 27.5 – –Unrated 5,918 9.7 990 58.7

– loans granted under EBRD credit lines Â 5 0.0 7 0.4

B– 110 0.2 120 7.1ÑÑÑ 2 0.0 – –Unrated 10 0.0 12 0.7

Total loans to banks and other borrowers 60,926 100.0 1,688 100.0Other financial assets Unrated 219 100.0 113 100.0

The credit risk of loans granted to banks to support their liquidity has increased subsequent tothe reporting date. Following the downgrade of Ukraine's sovereign ratings and significant financialdifficulties experienced by some Ukrainian banks, the international rating agencies downgraded anumber of Ukrainian banks and subsequently withdrew the ratings for some of the banks.

30. Currency riskAs at 31 December 2008, the NBU had the following positions in currencies:

(in UAH millions)UAH USD EUR SDR GBP Other Non- Total

monetary

Financial assetsForeign currency funds and deposits – 61,256 33,638 – 8,353 8,584 – 111,831Foreign securities – 49,303 55,946 – 21,613 – 121 126,983SDR Holdings – – – 66 – – – 66State securities of Ukraine 9,027 – – – – – – 9,027Loans to banks and other borrowers 60,799 127 – – – – – 60,926Internal State debt 3,370 6,979 – – – – – 10,349IMF Quota contributions – – – 16,272 – – – 16,272Other financial assets 165 – – 54 – – – 219Total financial assets 73,361 117,665 89,584 16,392 29,966 8,584 121 335,673Financial liabilitiesBanknotes and coins in circulation 167,538 – – – – – – 167,538Accounts of banks 18,897 2 5 – – – – 18,904Accounts of State and other institutions 7,776 1,822 304 – – 3,114 – 13,016Deposit certificates issued by the NBU 2,809 – – – – – – 2,809Loans received – 124 – – – – – 124Liabilities to the IMF – – – 52,649 – – – 52,649Other financial liabilities 490 1 6 – – 23 – 520Total financial liabilities 197,510 1,949 315 52,649 – 3,137 – 255,560Net balance sheet position (124,149) 115,716 89,269 (36,257) 29,966 5,447 121 80,113

Assets and liabilities in other currencies mainly include positions in Swiss francs andJapanese yen.

167


As at 31 December 2007, the NBU had the following positions in currencies:(in UAH millions)

UAH USD EUR SDR GBP Other Non- Totalmonetary

Financial assetsForeign currency funds and deposits – 38,426 32,424 – 8,640 5,317 – 84,807Foreign securities – 36,440 21,935 – 18,940 – 121 77,436SDR Holdings – – – 14 – – – 14State securities of Ukraine 395 – – – – – – 395Loans to banks and other borrowers 1,549 143 – – – – – 1,692Internal State debt 3,370 4,729 – – – – – 8,099IMF Quota contributions – – – 10,949 – – – 10,949Other financial assets 114 – – – – – – 114Total financial assets 5,428 79,738 54,359 10,963 27,580 5,317 121 183,506Financial liabilitiesBanknotes and coins in circulation 122,4711 – – – – – – 122,471Accounts of banks 19,338 2 77 – – – – 19,417Accounts of State and other institutions 4,476 7,824 35 – – 3,103 – 15,438Deposit certificatesissued by the NBU 3,117 – – – – – – 3,117

Loans received – 156 – – – – – 156Liabilities to the IMF – – – 13,146 – – – 13,146Other financial liabilities 321 1 13 – – – – 335Total financial liabilities 149,723 7,983 125 13,146 – 3,103 – 174,080Net balance sheet position (144,295) 71,755 54,234 (2,183) 27,580 2,214 121 9,426

31. Interest rate riskAs at 31 December 2008 the NBU had the following structure of the weighted average inter-

est rates by major currencies for monetary financial interest-bearing instruments. The analysishas been prepared using the weighted-average contractual rates at the balance sheet date.

(in %)UAH USD EUR SDR GBP Other Total

weighted averageinterest rate

Financial assetsTerm deposits in OECD countries – 3.10 4.02 – 5.60 1.78 3.53Foreign securities – 1.22 2.38 – 1.97 – 1.85SDR Holdings – – – 0.82 – – 0.82State securities of Ukraine 11.60 – – – – – 11.60Loans to banks and other borrowers 14.15 4.32 – – – – 14.09Financial liabilitiesTerm deposits of banks 9.60 – – – – – 9.60Accounts of Government and other institutions 4.43 – – – – – 4.43Deposit certificates issued by the NBU 19.20 – – – – – 19.20Loans received – 3.57 – – – – 3.57Liabilities to the IMF in respect of purchases of funds under credit facilities – – – 1.84 – – 1.84

The sign "–" in the table above means that the NBU has no respective interest bearingassets or liabilities in corresponding currency.

168

Annual Repor t 2008

Interest is accrued at floating rates on the following assets and liabilities: on SDR holdingsand liabilities to IMF the interest rate changes on a weekly basis; on the loans to banks andother borrowers granted under EBRD credit line and loans received from EBRD, the interestrate is LIBOR +3% and LIBOR +1% respectively which is revised twice a year.

If the interest rate on liabilities to the IMF in respect of purchases of funds under credit facil-ities had been 100 basis points higher / lower, with all other variables held constant, profit andequity of the NBU would have been UAH 363 million lower / higher as a result of higher / lowerinterest expense on variable interest liabilities to the IMF. Changes in LIBOR rate applicable toloans issued to banks granted under EBRD credit line and loans received from EBRD would nothave significant impact on the NBU's profit or equity as the amount of performing loans grant-ed to banks approximates the amount of loans received from EBRD.

As at 31 December 2007 the NBU had the following interest rates on assets and liabilities:(in %)

UAH USD EUR SDR GBP Other Totalweighted average

interest rate

Financial assetsTerm deposits in OECD countries – 5.05 4.43 – 6.13 2.28 4.74Foreign securities – 3.49 4.24 – 4.63 – 3.98SDR Holdings – – – 3.50 – – 3.50State securities of Ukraine – – – – – – –Loans to banks and other borrowers 9.95 6.50 – – – – 9.42Financial liabilitiesTerm deposits of banks 6.40 – – – – – 6.40Accounts of Government and other institutions 3.1 – – – – – 3.1Deposit certificatesissued by the NBU 3.75 – – – – – 3.75

Loans received – 5.85 – – – – 5.85Liabilities to the IMF in respect of purchases of funds under credit facilities – – – 4.77 – – 4.77

Interest rate repricing analysis of assets and liabilities The table below summarises concentration of the interest rate repricing risk categorised by

the earlier of contractual repricing or maturity dates.For the assets and liabilities with fixed interest rates, classification is determined based on

the contractual maturity date. For the assets and liabilities with variable interest rates, classifi-cation was determined with taking into account the earlier repricing term or maturity date.

Foreign securities at fair value through profit or loss have been classified within demandand up to 1 month category as the Management believe this is a fairer portrayal of its repricingposition.

169


As at 31 December 2008 interest rate repricing analysis of the NBU's financial assets andliabilities is presented below:

(in UAH millions)Demand 1 to 3 3 to 12 1 to 5 Over Non- Totaland up months months years 5 years interest

to 1 month bearing

Financial assetsForeign currency funds and deposits 44,666 33,546 33,417 4 – 198 111,831Foreign securities 126,862 – – – – 121 126,983SDR Holdings 66 – – – – – 66State securities of Ukraine – 156 32 6,451 1,993 395 9,027Loans to banks and other borrowers 326 2,397 58,135 68 – – 60,926Internal State debt – – – – – 10,349 10,349IMF Quota contributions – – – – – 16,272 16,272Other financial assets – – – 80 81 58 219Total financial assets 171,920 36,099 91,584 6,603 2,074 27,393 335,673Financial liabilitiesBanknotes and coins in circulation – – – – – 167,538 167,538Accounts of banks 88 – – – – 18,816 18,904Accounts of State and other institutions 26 – – – – 12,990 13,016Deposit certificates issued by the NBU 2,809 – – – – – 2,809Loans received – – 124 – – – 124Liabilities to the IMF 36,377 – – – – 16,272 52,649Other financial liabilities 465 – – – – 55 520Total financial liabilities 39,765 – 124 – – 215,671 255,560Net gap 132,155 36,099 91,460 6,603 2,074 (188,278) 80,113Cumulative gap 132,155 168,254 259,714 266,317 268,391 80,113 –

Included in the loans to banks and other borrowers in category "1 to 5 years" are the loansof UAH 68 million granted for 3 years against the deposit placed by the counterparty for onemonth. The terms of loan agreement require monthly renewal of the deposit and the counter-party's failure to comply with this condition results in immediate repayment of the loan.

As at 31 December 2007 the interest rate repricing analysis of the NBU's financial assetsand liabilities is presented below:

(in UAH millions)Demand 1 to 3 3 to 12 1 to 5 Over Non- Totaland up months months years 5 years interest

to 1 month bearing

Financial assetsForeign currency funds and deposits 11,932 20,956 51,829 1 – 89 84,807Foreign securities 77,315 – – – – 121 77,436SDR Holdings 14 – – – – – 14State securities of Ukraine – – – – – 395 395Loans to banks and other borrowers 125 237 1,192 138 – – 1,692Internal State debt – – – – – 8,099 8,099IMF Quota contributions – – – – – 10,949 10,949Other financial assets – – 1 59 52 2 114Total financial assets 89,386 21,193 53,022 198 52 19,655 183,506Financial liabilitiesBanknotes and coins in circulation – – – – – 122,471 122,471Accounts of banks 141 – – – – 19,276 19,417Accounts of State and other institutions 18 – – – – 15,420 15,438Deposit certificates issued by the NBU 2,266 726 125 – – – 3,117Loans received – – 156 – – – 156Liabilities to the IMF 2,197 – – – – 10,949 13,146Other financial liabilities 308 – – – – 27 335Total financial liabilities 4,930 726 281 – – 168,143 174,080Net gap 84,456 20,467 52,741 198 52 (148,488) 9,426Cumulative gap 84,456 104,923 157,664 157,862 157,914 9,426 –

170

Annual Repor t 2008

Included in the loans to banks and other borrowers in category "1 to 5 years" are the loansof UAH 138 million granted for 3 years against the deposit placed by the counterparty for onemonth. The terms of loan agreement require monthly renewal of the deposit and the counter-party's failure to comply with this condition results in immediate repayment of the loan.

32. Liquidity riskFor the purposes of liquidity risk calculation the liabilities are analysed by the remaining

contractual maturity at the balance sheet date. The amounts disclosed in the maturity table are the contractual undiscounted cash flows.

Such undiscounted cash flows differ from the amount included in the balance sheet because thebalance sheet amount is based on the discounted cash flows. Net settled derivatives are includ-ed at the net amounts expected to be paid. When the amount payable is not fixed, the amountdisclosed is determined by reference to the conditions existing at the reporting date. Foreign cur-rency payments are translated using the spot exchange rate at the balance sheet date.

The liquidity risk position of the NBU as at 31 December 2008 is set out below:(in UAH millions)

Demand 1 to 3 3 to 12 1 to 5 Over Non- Totaland up months months years 5 years interest

to 1 month bearing

Financial liabilitiesBanknotes and coins in circulation 167,538 – – – – – 167,538Accounts of banks 18,905 – – – – – 18,905Accounts of State and other institutions 13,016 – – – – – 13,016Deposit certificates issued by the NBU 2,821 – – – – – 2,821Loans received – – 70 59 – – 129Liabilities to the IMF 126 419 801 36,825 – 16,231 54,402Other financial liabilities 510 4 – 5 – 1 520Gross loan commitments 2,649 – – – – – 2,649Total potential future payments for financial obligations 205,565 423 871 36,889 – 16,232 259,980

Part of liabilities to the IMF representing the liabilities in settlement of Quota is included in"no maturity" category due to the nature of this balance.

The liquidity risk position of the NBU as at 31 December 2007 is set out below:(in UAH millions)

Demand 1 to 3 3 to 12 1 to 5 Over Non- Totaland up months months years 5 years interest

to 1 month bearing

Financial liabilitiesBanknotes and coins in circulation 122,471 – – – – – 122,471Accounts of banks 19,418 – – – – – 19,418Accounts of State and other institutions 15,438 – – – – – 15,438Deposit certificatesissued by the NBU 2,267 732 133 – – – 3,132

Loans received – – 82 86 – – 168Liabilities to the IMF 85 705 1,036 469 – 10,921 13,216Other financial liabilities 320 13 – 1 – 1 335Gross loan commitments 1 – – – – – 1Total potential future payments for financial obligations 160,000 1,450 1,251 556 – 10,922 174,179

33. Commitments, contingencies and derivative financial instrumentsGuarantees issuedGuarantees were issued by the NBU in 1992 in accordance with a decree of the Parliament

of Ukraine after issue of respective guarantees by the Cabinet of Ministers of Ukraine to cover

171


172

Annual Repor t 2008

repayment of loans received by Ukrainian borrowers from foreign creditors. Loans outstandingcovered by these guarantees were partially repaid and partially restructured.

Restructured loans are repaid by the Ministry of Finance of Ukraine from funds of the Statebudget of Ukraine in accordance with the Agreement between the Government of Ukraine andGovernment of the Federal Republic of Germany entered into in December 2001.

As the debts covered by these guarantees are serviced by the Cabinet of Ministers ofUkraine, the NBU does not expect any expenses arising in respect of these guarantees.

Commitments to extend creditCommitments to extend credit include the following:


Commitments to extend credit under international credit lines – 1Commitments to extend credit under loans to support the banks' liquidity 2,649 –Total commitments to extend credit 2,649 1

Capital commitmentsAs at 31 December 2008 the NBU had capital commitments in respect of fixed asset pur-

chases, construction and improvements and intangible assets purchases totalling UAH 535 mil-lion (2007: UAH 160 million).

Derivative financial instrumentsStarting from December 2007 the NBU has been performing operations with futures for the

purposes of regulating the interest rate risk. These operations are performed as a part ofInvestment Management and Consulting Services Agreement between the NBU andInternational Bank for Reconstruction and Development.

As at 31 December 2008 the NBU had 1,109 long stock-exchange interest futures contractsmaturing from March 2009 to December 2012 and the nominal value of UAH 2,107 million (USD274 million) (31 December 2007: 342 long stock-exchange Euro-dollar interest futures contractsmaturing from March 2008 to March 2010, with the nominal value of UAH 416 million, or USD 82million) and 172 short contracts with the nominal value of UAH 320 million or USD 42 million.

Legal proceedingsFrom time to time and in the normal course of business, claims against the NBU are

received. On the basis of own estimates and internal professional advice the Management is ofthe opinion that no material losses will be incurred by the NBU and accordingly no provision hasbeen made in these financial statements.

34. Fair value of financial instrumentsThe estimated fair values of financial assets and liabilities have been determined by the

NBU using available market information, where it exists, and appropriate valuation methodolo-gies. However, judgement is necessarily required to interpret the market data to determine theestimated fair value. As disclosed in Note 4, the economy of Ukraine displays characteristics ofan emerging market, and the level of activity in financial markets of Ukraine at the moment islow. As such, the estimates may not be fully reflective of the value that could be realised by theNBU in the current circumstances.

Financial assets and liabilities carried at fair value. Debt securities at fair value throughprofit or loss are recorded in the balance sheet at their fair value. Fair value of these securitiesis based on quoted prices in an active market. The NBU has estimated that the fair value of cer-tain financial assets and liabilities is not materially different from their carrying values. Thesefinancial instruments include funds and deposits in foreign currency, SDR holdings, banknotesand coins in circulation, accounts of banks, accounts of State and other institutions, deposit cer-tificates issued by the NBU, loans received and liabilities to the IMF.

Fair values of those financial instruments for which no active market exists havebeen estimated by the NBU using discounted cash flow techniques. This model takes intoaccount future interest payments and principal repayments, the repayment period and the dis-count factor. As the determination of the discount factor is subjective, the NBU has used a rangeof discount factors which resulted in a range of fair values calculated for the same category ofassets. The discounted cash flows method was used by the NBU to estimate fair values of Statesecurities of Ukraine denominated in the national currency, internal State debt and loans tobanks and other borrowers. The following methods and assumptions were used for the pur-poses of discounted cash flow calculations:

Fair value of State securities of Ukraine denominated in the national currency. This cat-egory includes promissory notes of the State Treasury of Ukraine and domestic State debt bonds.

To estimate the upper value of the promissory notes of the State Treasury of Ukraine anddomestic State bonds, the NBU used the discount factor of 12% per annum, being the NBU dis-count rate effective on 31 December 2008 (2007: the NBU used the discount factor of 6.6% perannum, being the average yield on domestic State bonds with maturity date on 23 June 2010sold on the primary market on 26 November 2007).

To estimate the lower value of the promissory notes of State Treasury of Ukraine anddomestic State bonds, the NBU used the discount rate of 17.0% per annum being the averageyield on domestic State bonds sold on the primary market on 30 December 2008 (2007: theNBU used the discount factor of 8% being the NBU discount rate effective as at 31 December2007).

For the purposes of calculating the fair value of promissory notes of the State Treasury ofUkraine, the NBU did not take into account any interest income, as no interest accrual is envis-aged by effective legislation.

The fair value of internal State debt in respect of the loans to Government in foreigncurrency. To estimate the fair value, the NBU used the discount factor of 25.607% per annumbeing the yield on USD-denominated external Government bonds on the Ukrainian externaldebt securities market as at 1 January 2009 with the maturity date in 2017 and coupon rate of6.75% per annum (2007: discount rate of 6.935% per annum being the yield on USD-denomi-nated external Government bonds on the Ukrainian State debt securities market with similarmaturity dates).

As disclosed in Note 9, the Law of Ukraine on State budget of Ukraine for 2009 provides forrestructuring in 2009 of the balance of debt of the Government to the NBU defined in the Law onRestructuring, through issue of internal State bonds to be transferred to the NBU, however termsand conditions of these bonds are not specified. Therefore the discounted cash flows have beenestimated from 2009, given that servicing of the debt will not be in accordance with the repay-ment schedule envisaged by the Law of Ukraine On Restructuring and that the debt would notbe repaid by 2009, as it was envisaged, but that the repayment will be in line with recent actualservicing of USD 33 million (amount repaid during 2008) per annum up to its final repayment.

The fair value of internal State debt in respect of the national currency denominatedloans to Government granted in 1994–1996.

To estimate the upper value, the NBU used the discount factor of 12% per annum being theNBU discount rate effective on 31 December 2008 (2007: the NBU used the discount factor of6.6% per annum being the average yield on domestic Government bonds placed on the primarymarket on 26 November 2007).

To estimate the lower value of loans, the NBU used the discount rate of 17.0% per annumbeing the average yield on domestic State bonds sold on the primary market on 30 December2008 (2007: the NBU used the discount factor of 8% being the NBU discount rate effective asat 31 December 2007).

As at the end of 2008 the cash flows for the purposes of calculating the fair value of loansto Government in national currency included the amount of interest at 5% per annum for serv-icing the loans starting from 2010.

173


Fair value of the loans to banks and other borrowers As disclosed in Note 4, during October-December 2008 due to the sharp deterioration of

economic conditions and lack of liquidity in the banking market, the NBU significantly increasedthe volume of refinancing operations with Ukrainian banks. Due to significant uncertainty perti-nent to the current economic conditions, the NBU is not able to reliably estimate the future cash-flows in respect of the loans issued to Ukrainian banks during the fourth quarter of 2008 for thepurposes of estimating the fair value of these loans (2007: the fair value of loans to banks andother borrowers was approximating the carrying value of the loans).

The following table summarises the carrying amounts and estimated fair values of thosefinancial assets not presented on the NBU's balance sheet at their fair value:


Carrying Estimated Carrying Estimatedvalue fair value value fair value

Upper Lower Upper LowerValue value Value value

State securities of Ukraine in national currency:Promissory notes of the State Treasury of Ukraine 395 339 320 395 340 330Domestic State bonds 8,632 9,118 7,993 – – –Total State securities of Ukraine 9,027 9,457 8,313 395 340 330Internal State debt on loans in foreign currency 6,979 994 994 4,729 2,730 2,730Internal State debt in national currency arising in 1994–1996 3,370 1,885 1,395 3,370 2,676 2,346Total internal State debt 10,349 2,879 2,389 8,099 5,406 5,076Loans to banks and other borrowers 60,926 N/A N/A 1,692 1,692 1,692

Taking into account the fact that the calculations of the estimated fair value are based oncertain assumptions, it should be noted that the information provided above may not be fullyreflective of the value that could be realised.

35. Presentation of financial instruments by measurement categoriesIn accordance with IAS 39, Financial Instruments: Recognition and Measurement, the NBU

classifies its financial assets into the following categories: loans and receivables; financialassets at fair value through profit or loss; available-for-sale financial assets and financial assetsheld to maturity.

All financial liabilities of the NBU are carried at amortised cost.

174

Annual Repor t 2008

The following table analyses financial instruments by these measurement categories as of31 December 2008:

The following table analyses financial instruments by the measurement categories as of 31December 2007:

175


(in UAH millions)

Financial assetsForeign currency funds and deposits 111,823 8 – – – 111,831Foreign securities – 126,862 121 – – 126,983SDR Holdings 66 – – – – 66State securities of Ukraine 8,632 – – 395 – 9,027Loans to banks and other borrowers 60,926 – – – – 60,926Internal State debt 10,349 – – – – 10,349IMF Quota contributions – – 16,272 – – 16,272Other financial assets 219 – – – – 219Total financial assets 192,015 126,870 16,393 395 – 335,673Financial liabilitiesBanknotes and coins in circulation – – – – 167,538 167,538Accounts of banks – – – – 18,904 18,904Accounts of State and other institutions – – – – 13,016 13,016Deposit certificates issued by the NBU – – – – 2,809 2,809Loans received – – – – 124 124Liabilities to the IMF – – – – 52,649 52,649Other financial liabilities – – – – 520 520Total financial liabilities – – – – 255,560 255,560

Loansand

receivables

Assets at fairvalue throughprofit or loss

Available-for-saleassets

Assets held to maturity

Financialliabilities

at amortisedcost

Total

(in UAH millions)

Financial assetsForeign currency funds and deposits 84,806 1 – – – 84,807Foreign securities – 77,315 121 – – 77,436SDR Holdings 14 – – – – 14State securities of Ukraine – – – 395 – 395Loans to banks and other borrowers 1,692 – – – – 1,692Internal State debt 8,099 – – – – 8,099IMF Quota contributions – – 10,949 – – 10,949Other financial assets 114 – – – – 114Total financial assets 94,725 77,316 11,070 395 – 183,506Financial liabilitiesBanknotes and coins in circulation – – – – 122,471 122,471Accounts of banks – – – – 19,417 19,417Accounts of State and other institutions – – – – 15,438 15,438Deposit certificates issued by the NBU – – – – 3,117 3,117Loans received – – – – 156 156Liabilities to the IMF – – – – 13,146 13,146Other financial liabilities – – – – 335 335Total financial liabilities – – – – 174,080 174,080

Loansand

receivables

Assets at fairvalue throughprofit or loss

Available-for-saleassets

Assets held to maturity

Financialliabilities

at amortisedcost

Total

36. Related party transactionsFor the purposes of these financial statements, parties are considered to be related if the

parties are under common control or one party has the ability to control the other party or canexercise significant influence over the other party in making financial or operational decisionsas defined by IAS 24 "Related Party Disclosures". In considering each possible related partyrelationship, attention is paid to the substance of the relationship, not merely the legal form.Related parties of the NBU include the Government, state-controlled entities, key managementpersonnel and other related parties.

In the normal course of business the NBU enters into transactions with the related parties.The outstanding balances at the year end are as follows:

(in UAH millions)

2008 2007Notes Govern- Associa- Other Govern- Associa- Other

ment and tes related ment and tes relatedState- parties State- parties

controlled controlledentities entities

State securities of Ukraine 7 9,027 – – 395 – –Loans to banks and other borrowers 8 23,386 – – – – –Internal State debt, gross 9 11,145 – – 8,660 – –Provision against internal State debt 9 (796) – – (561) – –Other assets 12 5 90 7 2 46 1Accounts of banks 13 3,612 – – 1,180 – –Accounts of State and other institutions 14 12,917 54 36 15,328 35 72Profits payable to the State Budget 18 4,455 – – 4,834 – –Deposit certificates issued by the NBU 15 1,000 – – 300 – –Other liabilities 17 4 – – 2 – –

All balances presented in the table above are non-interest bearing except for:loans to State-owned banks with the contractual interest rates from 12% to 18% as at 31

December 2008 (31 December 2007: none) maturing within 12 months; demand accounts of State and other institutions totalling UAH 26 million with the contrac-

tual interest rate of 4.43% as at 31 December 2008 (31 December 2007: UAH 18 million withthe contractual interest rate of 3.1%);

deposit certificates issued by the NBU with the contractual interest rate of 12% as at 31December 2008 (31 December 2007: from 2.5% to 7.0%) maturing within one month.

Income and expense items from operations with the related parties are as follows:(in UAH millions)

2008 2007Govern- Associa- Other Govern- Associa- Other

ment and tes related ment and tes relatedState- parties State- parties

controlled controlledentities entities

Interest income 239 – – 2 – –Interest expense 7 – 1 6 – 5Fee and commission income 95 – 2 14 – –Other income 8 1 2 – 2 –Other expenses 7 – 2 14 – 2Net increase in provisions 235 – – 172 – –

In 2008 the short-term benefits (salaries) of key management personnel amounted to UAH8 million (2007: UAH 6 million). As at 31 December 2008 outstanding balance of loans to thekey management personnel totalled UAH 2 million (2007: UAH 3 million).

176

Annual Repor t 2008

37. Concentration of assets and liabilitiesAs at 31 December 2008 6% (2007: 5%) of the total NBU assets, excluding IMF Quota, are

represented by amounts due from the Government of Ukraine in respect of internal State debtand State securities of Ukraine, 4% (2007: 0%) are represented by funds placed with theFederal Reserve Bank of New York, 3% (2007: 2%) are represented by funds placed with BNPParibas, 9% (2007: 14%) are represented by US Treasury bills, 20% (2007: 16%) are repre-sented by the coupon bonds of UK Government and other EU countries and 18% (2007: 1%)are represented by loans to Ukrainian banks and other borrowers.

As at 31 December 2008 69% (2007: 75%) of the total NBU's liabilities (excluding the prom-issory notes issued to the IMF in settlement of Quota) are represented by banknotes and coinsin circulation, 5% (2007: 9%) are represented by funds of the State Treasury of Ukraine, 8%(2007: 12%) are represented by accounts of banks and 15% (2007: 1%) are represented by lia-bilities to the IMF.

38. Subsequent eventsIn January 2009 the NBU transferred to the State Budget UAH 1,000 million as partial set-

tlement of the liability to transfer the excess of income over expenditure for 2008. An addition-al transfer of UAH 1,000 million was made in April 2009.

On 12 February 2009 Fitch Ratings downgraded Ukraine's long-term foreign and local cur-rency Issuer Default Ratings to 'B' from 'B+'. This reflects the increased risk of a banking andcurrency crisis in Ukraine, due to intensified stress on the financial system. The Outlooks onboth Issuer Default Ratings are 'negative'. The agency has also downgraded the CountryCeiling to 'B' from 'B+'.

On 25 February 2009 Ukraine's credit rating was cut two levels by Standard & Poor's dueto the political turmoil. The long-term foreign currency rating was lowered to CCC+. The agencyleft Ukraine's outlook 'negative', indicating it might reduce the ratings further.

After the balance sheet date the international reserves of the NBU decreased from USD31.5 billion as at 31 December 2008 to USD 25.4 billion as at 31 March 2009.

In 2009 the NBU continued to provide loans to banks to support their liquidity and the totalamount of these loans increased to UAH 79,347 million as at 9 April 2009.

10 April 2009Kyiv, Ukraine

177


Part 6

TABLES

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Total

retai

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1 2

3 4

5 6

7 8

9 10

11

20

05

1 048

481

607 0

29

441 4

52

102.7

12

4.5

468 5

63

103.1

92

536

93 09

6 94

332

2006

1 2

52 20

9 70

8 056

54

4 153

10

7.3

114.8

55

1 729

10

6.2

94 30

0 12

5 254

12

9 952

20

07

1 650

992

930 2

61

720 7

31

107.9

12

2.7

717 0

77

110.2

10

9 850

18

8 486

17

8 233

20

08

Janu

ary

…

…

57 72

0 10

4.9

123.6

54

592

106.1

3 3

70

…

15 02

4 Ja

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y-Feb

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…

11

8 557

10

5.8

125.0

11

3 110

10

8.9

7 100

…

31

026

Janu

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43

7 737

25

0 020

18

7 717

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6.3

126.6

17

8 686

10

7.9

10 80

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115

49 83

9 Ja

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26

6 575

10

6.2

131.2

24

7 113

10

8.0

16 97

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453

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…

348 0

83

106.4

13

3.1

318 8

81

108.1

24

500

…

90 42

1 Ja

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y-Jun

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7 674

55

6 257

42

1 417

10

6.3

129.5

39

3 050

10

7.7

34 13

0 81

561

110 5

59

Janu

ary-J

uly

…

…

530 2

76

106.5

13

4.3

470 6

11

107.3

78

100

…

133 0

14

Janu

ary-A

ugus

t …

…

62

8 108

10

7.1

134.3

54

2 873

10

6.3

108 3

40

…

155 5

31

Janu

ary-S

eptem

ber

1 617

688

920 4

94

697 1

94

106.3

12

9.6

612 6

23

105.1

11

5 740

13

6 971

17

7 535

Ja

nuar

y-Octo

ber

…

…

799 9

96

105.8

13

2.9

671 1

61

102.3

12

6 502

…

20

1 422

Ja

nuar

y-Nov

embe

r …

…

87

5 376

10

3.6

132.0

71

9 983

99

.2 13

9 385

…

22

0 756

Ja

nuar

y-Dec

embe

r 2 2

05 33

4 1 2

55 47

0 94

9 864

10

2.1

129.1

77

9 127

96

.9 15

0 845

23

3 081

24

3 898

182

Annual Repor t 2008

Not

e: in

form

atio

n of

the

Sta

te C

omm

ittee

of S

tatis

tics

of U

krai

ne.

Basi

c in

dica

tors

of t

he e

cono

mic

dev

elop

men

t of U

krai

neG

ross

dom

estic

pro

duct

, ind

ustr

ial a

nd a

gric

ultu

ral o

utpu

t, in

vest

men

ts, r

etai

l tur

nove

r(in

act

ual p

rices

, UA

H m

illio

n)

Cons

umer

price

inde

x, %

Ind

ustria

l pro

duce

r pric

e ind

ex, %

To

tal in

come

of th

e pop

ulatio

n Co

nsoli

dated

budg

et2 ,

% o

f GDP

Perio

d wi

th res

pect

to the

pre

vious

mo

nth

with

respe

ct to

Dece

mber

of the

pre

vious

ye

ar1

with

respe

ct to

the

previo

us

month

with

respe

ct to

Dece

mber

of the

pre

vious

ye

ar1

Unem

ploym

ent r

ate

(at th

e end

of

perio

d),

%

Nomi

nal

real

dispo

sable

, %

(with

infla

tion

taken

into

acco

unt)

Expe

nditu

re of

the

popu

lation

(n

et of

savin

gs)

Aver

age

mont

hly

nomi

nal w

age,

UAH

Real

aver

age

month

ly wa

ge in

dex,

%1

Reve

-nu

es

Expe

ndit

ure3

defic

it (–)

, su

rplus

(+

)

1 2

3 4

5 6

7 8

9 10

11

12

13

14

20

05

…

110.3

…

10

9.5

3.1

381 4

04

123.9

33

5 753

80

6 13

1.5

30.4

32.1

–1.8

2006

…

11

1.6

…

114.1

2.7

47

2 061

11

1.8

427 8

58

1 041

11

1.7

31.6

32.2

–0.7

2007

…

11

6.6

…

123.3

2.3

62

3 289

11

4.8

575 5

10

1 351

11

0.3

30.5

31.4

–1.1

2008

Janu

ary

102.9

10

2.9

102.3

10

2.3

2.4

52 48

0 12

3.4

49 21

7 1 5

21

88.6

31.7

24.9

6.9

Febr

uary

10

2.7

105.7

10

3.0

105.4

2.4

11

0 275

12

2.1

103 0

19

1 575

92

.6 34

.3 29

.4 4.9

Ma

rch

103.8

10

9.7

106.6

11

2.4

2.3

176 0

20

120.1

16

9 108

1 6

18

92.9

32.9

29.8

3.0

April

103.1

11

3.1

106.6

11

9.8

2.2

237 1

15

117.7

22

5 170

1 6

47

91.2

32.6

30.5

2.0

May

101.3

11

4.6

103.7

12

4.2

2.0

303 2

01

116.0

28

8 105

1 6

73

92.0

33.1

29.7

3.4

June

10

0.8

115.5

10

4.2

129.4

1.9

38

1 770

11

4.5

361 1

10

1 707

96

.8 32

.4 30

.8 1.6

Ju

ly 99

.5 11

4.9

103.6

13

4.1

1.8

451 8

74

113.7

42

5 523

1 7

39

99.7

30.4

29.1

1.3

Augu

st 99

.9 11

4.8

101.8

13

6.5

1.8

528 5

24

113.4

49

3 839

1 7

55

96.9

30.6

28.3

2.3

Septe

mber

10

1.1

116.1

98

.2 13

4.0

1.8

609 7

13

111.8

56

4 431

1 7

73

98.0

31.3

29.4

1.7

Octob

er

101.7

11

8.0

98.6

132.1

1.9

68

4 584

11

2.4

636 8

13

1 787

96

.3 30

.3 29

.2 0.9

No

vemb

er

101.5

11

9.8

93.5

123.5

2.3

76

0 353

11

1.4

701 7

53

1 790

90

.3 30

.6 29

.7 0.6

De

cemb

er

102.1

12

2.3

99.6

123.0

3.0

85

6 633

10

9.6

786 8

61

1 806

97

.0 31

.4 32

.6 –1

.5 183

Tables

Basi

c in

dica

tors

of t

he e

cono

mic

dev

elop

men

t of U

krai

ne

Con

sum

er p

rice

inde

x, in

dust

rial p

rodu

cer

pric

e in

dex,

une

mpl

oym

ent r

ate,

inco

me

and

expe

nditu

re o

f the

pop

ulat

ion,

wag

e, g

over

nmen

t fin

ance

1A

nnua

l dat

a - D

ecem

ber w

ith re

spec

t to

Dec

embe

r of t

he p

revi

ous

year

.2

Exp

endi

ture

doe

s no

t com

pris

e lo

ans

min

us re

paym

ents

.3

Exc

ludi

ng c

redi

ting

with

out r

epay

men

t.

Not

e: in

form

atio

n of

the

Sta

te C

omm

ittee

of S

tatis

tics

of U

krai

ne a

nd th

e M

inis

try o

f Fin

ance

of U

krai

ne.

184

Annual Repor t 2008

Curre

nt ac

coun

t bala

nce

Expo

rt of

good

s and

servi

ces

Impo

rt of

good

s and

servi

ces

Gros

s exte

rnal

debt,

at th

e end

of

perio

d Pe

riod

USD

millio

n %

of G

DP

USD

millio

n %

of G

DP

USD

millio

n %

of G

DP

USD

millio

n %

of G

DP

Offic

ial re

serve

asse

ts,

at the

end o

f per

iod

USD

millio

n

1 2

3 4

5 6

7 8

9 10

20

05

2 531

2.9

44

378

51.3

43 70

7 50

.6 39

619

45.9

19 39

1 20

06

–1 61

7 –1

.5 50

239

46.6

53 30

7 49

.5 54

512

50.6

22 35

8 20

07

–5 27

2 –3

.7 64

001

44.8

72 15

3 50

.6 79

956

56.0

32 47

9 20

08

1s

t qua

rter

–3 70

0 –1

0.0

17 52

8 47

.4 21

979

59.5

87 80

2 57

.6 33

231

2nd q

uarte

r –3

359

–7.2

23 51

6 50

.2 27

425

58.5

94 86

8 57

.0 35

452

1st h

alf-ye

ar

–7 05

9 –8

.4 41

044

49.0

49 40

4 59

.0 94

868

57.0

35 45

2 3r

d qua

rter

–2 12

8 –3

.7 27

253

47.5

29 83

0 51

.9 10

2 439

55

.4 37

530

9 mon

ths

–9 18

7 –6

.5 68

297

48.4

79 23

4 56

.1 10

2 439

55

.4 37

530

4th qu

arter

–3

746

–9.2

17 31

5 42

.5 20

898

51.3

101 6

54

55.9

31 54

3 ye

ar

–12 9

33

–7.1

85 61

2 47

.0 10

0 132

55

.0 10

1 654

55

.9 31

543

Basi

c in

dica

tors

of t

he e

cono

mic

dev

elop

men

t of U

krai

neB

alan

ce o

f pay

men

ts, e

xter

nal d

ebt,

offic

ial r

eser

ve a

sset

s

185

Tables

Indicators 2004 2005 2006 2007 2008 Net foreign assets 45 086 81 825 67 041 51 443 –16 121

Claims on non-residents 77 357 124 602 146 737 209 251 320 504 Monetary gold and SDR holdings 1 186 1 398 1 814 2 489 4 144 Foreign currency 3 005 2 433 4 139 6 707 7 495 Transferable deposits 9 997 10 810 12 768 15 416 48 968 Other deposits 46 549 77 602 70 704 88 715 102 182 Securities other than shares 3 912 20 143 43 070 77 365 127 274 Loans 1 167 2 053 3 450 6 740 13 085 Shares and other equity 150 249 279 670 750 Insurance technical reserves – – – – – Financial derivatives – – – – 35 Other accounts receivable 11 392 9 914 10 514 11 150 16 570

less: Liabilities to non-residents 32 271 42 776 79 696 157 808 336 625 Transferable deposits 21 017 17 787 18 020 19 323 58 131 Other deposits 1 709 4 522 4 989 10 172 39 642 Securities other than shares 29 125 1 146 4 722 2 540 Loans 9 477 20 044 54 792 120 790 235 776 Insurance technical reserves – – – – – Financial derivatives – – – – 33 Other accounts payable 38 298 749 2 800 503

Domestic credit 109 255 146 752 248 631 440 027 778 432 Net claims on central government 14 516 –5 769 –6 757 –3 530 23 786

Claims on central government 20 711 13 845 14 133 15 362 41 885 Securities other than shares 9 447 3 783 4 609 6 195 25 953 Loans 9 849 9 294 9 042 8 660 11 145 Shares and other equity – – – – – Financial derivatives – – – – 5 Other accounts receivable 1 415 768 483 507 4 782

less: Liabilities to central government 6 195 19 614 20 890 18 892 18 099 Transferable deposits 5 702 18 745 18 889 15 889 13 482 Other deposits 6 0 0 40 51 Securities other than shares – – – – 15 Loans – – – – – Insurance technical reserves – – – – – Financial derivatives – – – – – Other accounts payable 487 869 2 001 2 963 4 552

Claims on other residents 94 739 152 522 255 388 443 557 754 646 Claims on other financial corporations 1 253 2 839 4 396 10 137 15 907

Transferable deposits – – – – – Other deposits – – – – – Securities other than shares 140 470 524 1 513 2 699 Loans 842 1 663 2 689 5 932 9 789 Shares and other equity 218 529 1 046 2 463 2 972 Insurance technical reserves – – – – – Financial derivatives – – – – 196 Other accounts receivable 53 177 137 228 252

Claims on regional and local gove rnment 187 317 363 467 490 Securities other than shares 148 311 358 452 476 Loans 39 5 4 4 12 Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 0 0 1 11 2

Claims on public non-financial corporations 6 443 7 232 9 229 13 705 37 855 Securities other than shares 814 632 278 248 278 Loans 5 592 6 492 8 899 13 426 37 538 Shares and other equity 8 32 7 10 4 Financial derivatives – – – – – Other accounts receivable 29 76 45 21 34

Survey of depository corporations (including the National Bank of Ukraine)1

(outstanding amounts at end of period, UAH, million)

186

Annual Repor t 2008

Indicators 2004 2005 2006 2007 2008

Claims on other non-financial corporations 70 606 106 261 159 049 258 254 418 913 Securities other than shares 2 041 3 253 4 180 7 178 7 755 Loans 66 166 99 744 151 758 247 199 406 321 Shares and other equity 2 022 2 880 2 681 3 205 2 601 Financial derivatives – – – – 176 Other accounts receivable 377 385 430 672 2 060

Claims on other resident sectors 16 250 35 873 82 352 160 994 281 482 Securities other than shares – 25 10 8 – Loans 16 192 35 744 82 124 160 566 280 717 Financial derivatives – – – – – Other accounts receivable 58 104 217 419 765

Monetary aggregate M3 125 705 194 071 261 063 396 156 515 727

Currency in circulation outside depository corporations 42 345 60 231 74 984 111 119 154 759 Transferable deposits 31 772 48 285 61 332 90 780 105 372

Other financial corporations 2 494 1 737 2 750 4 294 4 147 State and local government – – – – – Public non-financial corporations 3 869 4 116 3 505 4 325 7 241 Other non-financial corporations 16 174 23 165 28 340 40 896 52 168 Other sectors of the economy 9 235 19 266 26 737 41 265 41 816

Other deposits 51 366 84 629 123 098 189 374 252 397 Other financial corporations 2 790 4 392 5 991 11 048 15 158 Regional and local government – – – – – Public non-financial corporations 2 869 4 827 3 496 5 060 5 139 Other non-financial corporations 11 591 18 948 30 298 45 412 53 739 Other sectors of the economy 34 116 56 462 83 312 127 854 178 361

Securities other than shares 222 925 1 650 4 884 3 200 Other financial corporations 26 75 341 867 366 Regional and local government 0 – – – – Public non-financial corporations 0 6 3 1 4 Other non-financial corporations 119 482 915 3 272 1 888 Other sectors of the economy 76 362 391 744 943

Deposits exclude d from monetary aggregate M3 1 193 1 726 1 417 3 536 1 922 Transferable deposits 1 193 1 726 1 417 3 536 1 921

Other financial corporations – – – – – Regional and local government 1 193 1 726 1 417 3 536 1 921 Public non-financial corporations 0 – – – – Other non-financial corporations – – – – – Other sectors of the economy – – – – –

Other deposits 0 0 0 0 1 Other financial corporations – – – – – Regional and local government 0 – – 0 0 Public non-financial corporations – – – – – Other non-financial corporations – – – – – Other sectors of the economy 0 0 0 0 1

Securities other than shares excluded from monetary aggregate M3 – – – – – Other financial corporations – – – – – Regional and local government – – – – – Public non-financial corporations – – – – – Other non-financial corporations – – – – – Other sectors of the economy – – – – –

Loans 208 160 259 1 038 1 468 Financial derivatives – – – – 290 Insurance technical reserves – – – – – Shares and other equity 27 486 31 404 55 634 99 527 233 751 Other items (net) –251 1 216 –2 701 –8 787 9 153

1 Depository Corporations Survey (including National Bank of Ukraine) is an analytical form of presenting the statistical data of depository cor-porations (NBU and other depository corporations) that are consolidated into the generalized categories of assets and liabilities. The surveycomprises data on liabilities of depository corporations that are included to the monetary aggregates. The balance sheet identity in DepositoryCorporations Survey (including the National Bank of Ukraine) reflects the link of monetary aggregate M3 and other items with claims of depos-itory corporations on residents and non-residents. Beginning from December 2002, data are based on the standardized report forms for central banks and other depository corporations (banks)according to the IMF methodology.

Concluded

187

Tables

Indicators 2004 2005 2006 2007 2008

Net foreign assets 303 –12 175 –44 199 –113 882 –226 116 Claims on non-residents 12 225 14 305 20 571 30 610 57 706

Foreign currency 2 222 2 359 4 064 6 630 7 406 Transferable deposits 7 008 8 985 11 963 14 862 31 253 Other deposits 1 733 765 868 1 591 4 661 Securities other than shares 5 4 4 50 412 Loans 1 167 2 053 3 450 6 740 13 085 Shares and other equity 11 128 157 548 629 Insurance technical reserves – – – – – Financial derivatives – – – – 35 Other accounts receivable 79 11 65 188 226

less: Liabilities to non-residents 11 922 26 480 64 770 144 491 283 822 Transferable deposits 1 119 1 827 3 363 6 176 5 482 Other deposits 1 709 4 522 4 989 10 172 39 642 Securities other than shares 1 125 1 146 4 722 2 540 Loans 9 056 19 709 54 537 120 634 235 652 Insurance technical reserves – – – – – Financial derivatives – – – – 33 Other accounts payable 36 296 735 2 786 473

Claims on Nationa l Bank of Ukraine 11 808 24 988 22 614 33 576 34 326 Holdings of national currency 3 324 5 178 7 150 11 352 12 779 Transferable deposits 8 053 17 265 14 886 18 981 18 627 Other deposits 252 117 394 139 141 Securities other than shares 142 2 427 180 3 097 2 754 Loans – – – – – Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 37 2 5 8 25

Net claims on central government 1 779 2 380 2 192 2 744 13 032 Claims on central government 2 710 3 530 4 457 6 304 18 211

Securities other than shares 2 576 3 344 4 198 5 800 16 926 Loans – – – – – Shares and other equity – – – – – Financial derivatives – – – – 5 Other accounts receivable 134 186 259 504 1 280

less: Liabilities to central government 931 1 151 2 265 3 560 5 179 Transferable deposits 439 283 265 561 565 Other deposits 6 0 0 40 51 Securities other than shares – – – – 15 Loans – – – – – Insurance technical reserves – – – – – Financial derivatives – – – – – Other accounts payable 485 867 2 000 2 959 4 549

Claims on other residents 94 458 152 242 255 038 443 210 753 945 Claims on other financial corporations 1 230 2 815 4 352 10 091 15 800

Transferable deposits – – – – – Other deposits – – – – – Securities other than shares 140 470 524 1 513 2 699 Loans 842 1 663 2 689 5 932 9 789 Shares and other equity 195 505 1 022 2 434 2 906 Insurance technical reserves – – – – – Financial derivatives – – – – 196 Other accounts receivable 53 177 116 212 210

Claims on regional and local government 187 317 363 467 490 Securities other than shares 148 311 358 452 476 Loans 39 5 4 4 12 Shares and other equity – – – – – Financial derivatives – – – – – Other accounts receivable 0 0 0 11 2

Surveys of depository corporations (excluding National Bank of Ukraine)1

(outstanding amounts at end of period, UAH, million)

188

Annual Repor t 2008

Indicators 2004 2005 2006 2007 2008 Claims on public non-financial corporations 6 329 7 124 9 106 13 604 37 694

Securities other than shares 814 632 278 248 278 Loans 5 486 6 391 8 798 13 326 37 382 Shares and other equity 8 32 7 10 4 Financial derivatives – – – – – Other accounts receivable 21 69 24 19 30

Claims on other non-financial corporations 70 510 106 181 158 956 258 166 418 642 Securities other than shares 2 041 3 253 4 180 7 178 7 755 Loans 66 103 99 687 151 705 247 150 406 283 Shares and other equity 2 022 2 880 2 681 3 205 2 601 Financial derivatives – – – – 176 Other accounts receivable 344 361 390 633 1 827

Claims on other sectors of the economy 16 201 35 806 82 262 160 882 281 319 Securities other than shares – 25 10 8 – Loans 16 144 35 677 82 034 160 455 280 556 Financial derivatives – – – – – Other accounts receivable 57 104 217 419 763

Liabilities to National Bank of Ukraine 4 067 764 1 441 1 738 60 986 Transferable deposits 0 0 – – – Other deposits – – – – – Securities – – – – – Loans 4 067 762 1 439 1 737 60 985 Financial derivatives – – – – – Other accounts payable – 2 2 1 1

Transferable deposits included in monetary aggregate M3 31 593 48 115 61 136 90 364 104 807 Other financial corporations 2 494 1 737 2 750 4 294 4 147 Regional and local government – – – – – Public non-financial corporations 3 730 4 036 3 480 4 215 7 142 Other non-financial corporations 16 174 23 165 28 340 40 896 52 168 Other sectors of the economy 9 195 19 178 26 567 40 959 41 350

Other deposits included in monetary aggregate M3 51 366 84 629 123 098 189 374 252 397 Other financial corporations 2 790 4 392 5 991 11 048 15 158 Regional and local government – – – – – Public non-financial corporations 2 869 4 827 3 496 5 060 5 139 Other non-financial corporations 11 591 18 948 30 298 45 412 53 739 Other sectors of the economy 34 116 56 462 83 312 127 854 178 361

Securities other than shares included in monetary aggregate M3 222 925 1 650 4 884 3 200 Other financial corporations 26 75 341 867 366 Regional and local government 0 – – – – Public non-financial corporations 0 6 3 1 4 Other non-financial corporations 119 482 915 3 272 1 888 Other sectors of the economy 76 362 391 744 943

Deposits excluded from monetary aggregates M3 1 193 1 726 1 417 3 536 1 921 Transferable deposits 1 193 1 726 1 417 3 536 1 921 Other deposits 0 – – 0 0

Securities other than shares excluded from monetary aggregate M3 – – – – – Loans 208 160 259 1 038 1 468 Financial derivatives – – – – 290 Insurance technical reserves – – – – – Shares and other equity 19 833 28 040 47 325 77 431 135 846 Other items (net) –133 3 074 –680 –2 716 14 272

Concluded

1 Depositotory Corporations Survey (excluding National Bank of Ukraine) is an analytical form of presenting statistical data of depositorycorporations (except NBU) that are consolidated into the generalized categories of assets and liabilities. The survey comprises data on lia-bilities of depository corporations that are included to the monetary aggregates. Beginning from December 2002, data are based on the standardized report form for other depository corporations according to the IMFmethodology.

189

Tables

including M3 1 M1 M2–M1 M3–M2

other deposits securities except shares including including Period

cash in circulation

outside depository

corporations (Ì0)

transferable deposits in

national currency

transferable deposits in

foreign currency

total in national currency

in foreign currency

total in national currency

in foreign currency

1 2 3 4 5 6 7 8 9 10 11 outstanding amounts at end of period, UAH, million 2005 194 071 60 231 38 341 9 944 84 629 48 955 35 674 925 766 160 2006 261 063 74 984 48 292 13 040 123 098 65 983 57 115 1 650 1 402 248 2007 396 156 111 119 70 546 20 233 189 374 119 740 69 634 4 884 4 595 289 2008

January 391 332 105 445 68 004 21 084 191 818 119 704 72 114 4 980 4 692 288 February 398 066 106 912 67 600 21 102 197 862 123 350 74 512 4 591 4 297 294 March 416 013 109 841 73 836 23 552 204 217 127 977 76 240 4 567 4 251 316 April 429 649 116 066 72 561 24 412 212 132 132 368 79 764 4 478 4 089 390 May 429 672 118 843 70 116 24 662 211 730 133 717 78 014 4 321 4 002 318 June 450 589 124 742 76 378 25 267 219 933 140 825 79 109 4 269 3 946 323 July 467 234 130 924 76 871 24 769 230 499 145 718 84 781 4 171 3 851 321 August 474 883 133 966 78 627 25 214 232 818 147 489 85 328 4 260 3 925 334 September 477 659 133 564 81 256 22 969 235 932 150 791 85 142 3 938 3 605 332 October 481 117 146 251 70 894 28 607 231 452 139 702 91 750 3 912 3 565 347 November 483 849 141 318 68 031 30 106 240 766 131 655 109 112 3 628 3 238 390 December 515 727 154 759 70 369 35 003 252 397 129 888 122 509 3 200 2 763 437

annual change, % 2005 54.4 42.2 54.9 41.5 64.8 74.3 53.3 317.6 470.3 82.7 2006 34.5 24.5 26.0 31.1 45.5 34.8 60.1 78.3 83.1 55.7 2007 51.7 48.2 46.1 55.2 53.8 81.5 21.9 196.0 227.8 16.2 2008

January 52.7 49.3 42.4 56.4 56.5 85.1 24.5 184.4 214.7 10.7 February 52.3 49.0 44.7 47.3 56.2 83.1 25.6 149.1 164.8 33.2 March 52.7 48.4 51.0 62.7 54.6 80.6 24.5 55.4 56.1 46.0 April 52.2 48.6 47.3 36.2 58.5 82.9 29.8 38.3 35.5 77.7 May 49.1 51.4 30.0 43.9 56.0 80.9 26.2 50.6 51.3 41.6 June 48.7 48.6 34.6 58.0 53.6 75.1 26.0 37.4 39.5 16.4 July 47.4 49.3 26.2 35.5 57.1 76.4 32.3 24.0 25.3 10.2 August 44.4 45.7 28.6 34.6 51.6 68.4 29.3 17.8 18.0 15.1 September 37.2 37.9 20.0 27.2 45.4 59.7 25.4 18.2 17.4 27.6 October 35.8 47.8 7.8 43.9 39.6 42.1 36.0 4.2 4.3 3.1 November 32.3 39.2 1.5 53.5 38.8 24.4 61.3 –9.0 –13.2 52.6 December 30.2 39.3 –0.3 73.0 33.3 8.5 75.9 –34.5 –39.9 51.6

Monetary aggregates and components

1 Monetary aggregates consist of liabilities of depository corporations to other sectors of the economy except general government andother depository corporations. Monetary aggregate Ì0 includes currency in circulation outside the depository corporations. Monetary aggregate Ì1 comprises monetary aggregate M0 and transferable deposits in national currency (M1–M0). Monetary aggregate Ì2 comprises monetary aggregate M1 and transferable deposits in foreign currency and other deposits (M2–M1). Monetary aggregate Ì3 comprises monetary aggregate M2 and securities other than shares (M3–M2). Beginning from December2002 monetary aggregates are based on the IMF methodology.

190

Annual Repor t 2008

Loan

s gr

ante

d by

dep

osito

ry c

orpo

ratio

ns (e

xclu

ding

Nat

iona

l Ban

k of

Ukr

aine

) by

sect

ors

of th

e ec

onom

y

includ

ing

other

finan

cial c

orpo

ratio

ns

gene

ral g

over

nmen

t no

n-fin

ancia

l cor

pora

tions

oth

er se

ctors

of the

econ

omy

includ

ing

includ

ing

includ

ing

includ

ing

Perio

d To

tal

total

insur

ance

co

rpor

ation

s an

d pen

sion

funds

other

fin

ancia

l int

er-

media

ries

and f

inanc

ial

auxil

iaries

total

centr

al go

vern

ment

re

giona

l and

loc

al go

vern

ment

total

publi

c non

-fin

ancia

l co

rpor

ation

s

other

non-

finan

cial

corp

orati

ons

total

hous

ehold

s no

n-pr

ofit

institu

tions

se

rving

ho

useh

olds

1 2

3 4

5 6

7 8

9 10

11

12

13

14

outst

andin

g amo

unts

at en

d of p

eriod

, UAH

, milli

on

20

05

143 4

23

1 663

…

…

5

–

5

106 0

78

6 391

99

687

35 67

7 35

659

18

2006

24

5 230

2 6

89

319

2 370

4

–

4

160 5

03

8 798

15

1 705

82

034

82 01

0 24

20

07

426 8

67

5 932

55

0 5 3

82

4

–

4

26

0 476

13

326

247 1

50

160 4

55

160 3

86

69

2008

Janu

ary

436 0

51

5 550

46

6 5 0

84

3

–

3

26

5 642

13

172

252 4

69

164 8

56

164 7

75

81

Febr

uary

45

5 477

5 8

07

483

5 325

3

–

3

275 3

52

13 05

9 26

2 293

17

4 315

17

4 234

81

March

48

1 037

6 8

26

563

6 263

2

–

2

290 5

65

12 30

5 27

8 259

18

3 644

18

3 580

64

April

494 7

50

6 946

54

0 6 4

06

2

–

2

29

5 838

12

758

283 0

80

191 9

63

191 8

99

64

May

499 5

21

6 953

56

7 6 3

86

7

–

7

29

8 943

13

146

285 7

97

193 6

18

193 5

46

72

June

51

8 091

7 4

50

544

6 906

4

–

4

311 9

07

13 98

8 29

7 919

19

8 730

19

8 650

81

July

531 3

32

7 070

51

4 6 5

56

3

–

3

31

9 718

13

764

305 9

54

204 5

41

204 4

66

74

Augu

st 54

7 841

7 3

32

526

6 805

3

–

3

331 6

84

14 62

2 31

7 062

20

8 822

20

8 729

93

Septe

mber

56

5 927

8 1

23

584

7 540

3

–

3

344 1

67

15 06

9 32

9 098

21

3 633

21

3 552

82

Octob

er

618 3

20

8 287

55

8 7 7

29

3

–

3

37

1 318

17

041

354 2

77

238 7

11

238 6

16

94

Nove

mber

67

1 573

8 4

43

598

7 845

3

–

3

402 9

59

17 96

9 38

4 991

26

0 168

26

0 081

86

Dece

mber

73

4 022

9 7

89

729

9 060

12

–

12

443 6

65

37 38

2 40

6 283

28

0 556

28

0 490

66

191

Tables

includ

ing

other

finan

cial c

orpo

ratio

ns

gene

ral g

over

nmen

t no

n-fin

ancia

l cor

pora

tions

oth

er se

ctors

of the

econ

omy

includ

ing

includ

ing

includ

ing

includ

ing

Perio

d To

tal

total

insur

ance

co

rpor

ation

s an

d pen

sion

funds

other

fin

ancia

l int

er-

media

ries

and f

inanc

ial

auxil

iaries

total

centr

al go

vern

ment

re

giona

l and

loc

al go

vern

ment

total

publi

c non

-fin

ancia

l co

rpor

ation

s

other

non-

finan

cial

corp

orati

ons

total

hous

ehold

s no

n-pr

ofit

institu

tions

se

rving

ho

useh

olds

1 2

3 4

5 6

7 8

9 10

11

12

13

14

annu

al ch

ange

, %

2005

61

.9 97

.5 …

…

–

87.2

–

–87.2

48

.2 16

.5 50

.8 12

1.0

12

1.1

20.0

2006

71

.0 61

.7 …

…

–1

1.5

–

–11.5

51

.3 37

.7 52

.2 12

9.9

13

0.0

34.0

2007

74

.1 12

0.6

72.4

127.1

–1

0.8

–

–10.8

62

.3 51

.5 62

.9 95

.6

95.6

18

5.1

2008

Janu

ary

78.0

133.2

60

.3 14

3.4

–20.2

–

–2

0.2

67.0

57.8

67.5

97.4

9

7.4

140.5

Febr

uary

77

.8 11

9.3

60.3

126.9

–3

1.0

–

–31.0

65

.6 40

.7 67

.0 99

.9

99.9

13

7.1

March

76

.2 12

7.2

85.0

132.0

–3

9.2

–

–39.2

64

.4 33

.5 66

.1 96

.8

96.8

64

.6

April

74.8

125.7

69

.3 13

2.2

4.6

–

4.6

63.8

29.2

65.7

93.2

9

3.2

65.7

May

69.5

122.9

76

.0 12

8.4

275.7

–

27

5.7

60.3

30.5

62.0

84.2

8

4.2

76.1

June

64

.1 13

8.9

106.8

14

1.9

126.8

– 12

6.8

55.4

33.1

56.6

77.6

7

7.7

59.7

July

61.1

119.0

82

.0 12

2.5

129.4

–

12

9.4

55.0

23.7

56.8

70.0

7

0.0

16.4

Augu

st 58

.8 98

.8 36

.7 10

6.1

136.4

–

13

6.4

55.0

34.7

56.1

64.0

6

4.0

41.9

Septe

mber

54

.1 84

.7 45

.5 88

.6 13

0.5

–

130.5

50

.5 18

.8 52

.4 59

.3

59.4

6.8

Octob

er

62.1

74.2

13.3

81.2

134.2

–

13

4.2

58.1

29.6

59.8

68.3

6

8.4

10.2

Nove

mber

66

.4 63

.0 15

.4 68

.2 –2

6.0

–

–26.0

62

.3 32

.6 64

.0 73

.2

73.3

–1

6.5

Dece

mber

72

.0 65

.0 32

.6 68

.3 20

3.5

–

203.5

70

.3 18

0.5

64.4

74.8

7

4.9

–4.4

Conc

lude

d

192

Annual Repor t 2008

Depo

sits

hel

d wi

th d

epos

itory

cor

pora

tions

(exc

ludi

ng N

atio

nal B

ank

of U

krai

ne) b

y se

ctor

s of

the

econ

omy

includ

ing

other

finan

cial c

orpo

ratio

ns

gene

ral g

over

nmen

t no

n-fin

ancia

l cor

pora

tions

oth

er se

ctors

of the

econ

omy

includ

ing

includ

ing

includ

ing

includ

ing

Perio

d To

tal

total

insur

ance

co

rpor

ation

s an

d pen

sion

funds

other

fin

ancia

l int

er-

media

ries

and f

inanc

ial

auxil

iaries

total

centr

al go

vern

ment

re

giona

l and

loc

al go

vern

ment

total

publi

c non

-fin

ancia

l co

rpor

ation

s

other

non-

finan

cial

corp

orati

ons

total

hous

ehold

s no

n-pr

ofit

institu

tions

se

rving

ho

useh

olds

1 2

3 4

5 6

7 8

9 10

11

12

13

14

outst

andin

g amo

unts

at en

d of p

eriod

, UAH

, milli

on

2005

13

4 754

6 1

29

…

…

2 010

28

4 1 7

26

50 97

6 8 8

62

42 11

4 75

640

74 77

8 8

62

2006

18

5 917

8 7

41

4 063

4 6

79

1 682

26

6 1 4

17

65 61

4 6 9

76

58 63

8 10

9 879

10

8 860

1 0

20

2007

28

3 875

15

343

7 043

8 3

00

4 136

60

1 3 5

36

95 58

3 9 2

75

86 30

8 16

8 813

16

7 239

1 5

75

2008

Janu

ary

287 3

68

14 31

1 5 4

45

8 865

6 8

33

3 140

3 6

93

93 22

7 8

703

84 52

4 17

2 997

17

1 326

1 6

71

Feb

ruar

y 29

1 873

14

201

5 439

8 7

62

5 685

1 7

00

3 985

93

067

8 21

6 84

851

178 9

20

177 2

23

1 697

M

arch

30

7 179

18

887

7 001

11

886

6 058

1 3

82

4 676

97

652

9 35

0 88

303

184 5

82

182 8

56

1 726

A

pril

315 0

20

16 78

0 5 9

64

10 81

5 6 4

07

1 254

5 1

53

100 3

10

8 61

3 91

697

191 5

23

189 7

07

1 816

M

ay

312 9

88

16 38

2 5 9

34

10 44

7 7 0

22

1 707

5 3

15

97 12

2 7

896

89 22

6 19

2 463

19

0 599

1 8

64

June

32

8 021

17

884

7 390

10

494

6 896

2 0

33

4 863

10

4 432

9

181

95 25

1 19

8 808

19

6 893

1 9

15

July

338 4

23

17 16

4 6 5

30

10 63

4 6 7

59

1 756

5 0

02

111 4

12

9 06

1 10

2 351

20

3 087

20

1 149

1 9

37

Aug

ust

342 8

88

17 60

1 6 5

54

11 04

7 6 7

13

2 061

4 6

53

111 6

28

8 94

7 10

2 682

20

6 944

20

4 992

1 9

51

Sep

tembe

r 34

7 063

19

040

8 115

10

925

7 406

2 6

89

4 716

11

1 376

8

822

102 5

53

209 2

41

207 3

10

1 931

O

ctobe

r 33

6 445

17

830

7 385

10

444

6 026

1 9

09

4 117

11

2 256

9

605

102 6

50

200 3

34

198 3

92

1 942

N

ovem

ber

344 0

51

17 25

0 7 4

37

9 813

5 6

72

2 165

3 5

07

110 1

63

9 69

4 10

0 469

21

0 966

20

9 024

1 9

42

Dec

embe

r 35

9 740

19

305

8 537

10

768

2 536

6

15

1 921

11

8 188

12

281

105 9

07

219 7

11

217 8

60

1 851

193

Tables

includ

ing

other

finan

cial c

orpo

ratio

ns

gene

ral g

over

nmen

t no

n-fin

ancia

l cor

pora

tions

oth

er se

ctors

of the

econ

omy

includ

ing

includ

ing

includ

ing

includ

ing

Perio

d To

tal

total

insur

ance

co

rpor

ation

s an

d pen

sion

funds

other

fin

ancia

l int

er-

media

ries

and f

inanc

ial

auxil

iaries

total

centr

al go

vern

ment

re

giona

l and

loc

al go

vern

ment

total

publi

c non

-fin

ancia

l co

rpor

ation

s

other

non-

finan

cial

corp

orati

ons

total

hous

ehold

s no

n-pr

ofit

institu

tions

se

rving

ho

useh

olds

1 2

3 4

5 6

7 8

9 10

11

12

13

14

annu

al ch

ange

, %

2005

59

.3 16

.0 …

…

2

2.7

–36.2

44

.7

48.3

34.3

51.7

74.6

75.9

6.7

2006

38

.0 42

.6 …

…

–1

6.3

–6.4

–17.9

28.7

–21.3

39

.2 45

.3 45

.6 18

.3 20

07

52.7

75.5

73.4

77.4

145.9

12

6.1

149.6

45.7

33.0

47.2

53.6

53.6

54.4

2008

Janu

ary

54.8

76.4

68.7

81.5

207.7

29

1.3

160.5

48.1

30.1

50.2

54.0

54.0

53.7

Febr

uary

53

.8 65

.8 54

.4 73

.8 13

4.2

93.4

157.5

49.8

7.5

55.8

53.4

53.4

47.5

March

55

.5 96

.7 51

.0 13

9.4

154.1

65

.9 20

1.4

50

.0 33

.0 52

.0 53

.3 53

.4 44

.0 Ap

ril 55

.0 94

.9 56

.0 12

5.9

130.8

39

.1 17

4.9

44

.2 –1

2.2

53.4

56.6

56.7

43.4

May

49.6

88.5

55.2

114.6

12

3.5

59.4

156.6

33.5

–1.2

37.8

54.4

54.6

39.4

June

49

.9 73

.3 50

.2 94

.5 8

7.7

49.3

110.4

40.5

21.3

42.7

52.2

52.4

38.5

July

47.7

66.0

43.1

84.0

91.5

44

.6 11

6.2

39

.5 29

.2 40

.5 50

.0 50

.2 32

.6 Au

gust

44.7

65.7

48.1

78.4

74.3

95

.9 66

.2

36.7

16.2

38.8

47.0

47.2

24.9

Septe

mber

37

.8 43

.9 36

.9 49

.6 7

8.0

135.9

56

.2

24.8

2.7

27.2

44.0

44.2

30.0

Octob

er

31.9

45.6

52.7

41.0

54.3

10

9.2

37.5

26

.7 14

.1 28

.1 33

.3 33

.5 14

.9 No

vemb

er

29.5

37.4

44.1

32.7

–3.2

62

.7 –2

2.6

24

.7 14

.9 25

.7 32

.8 33

.1 11

.0 De

cemb

er

26.7

25.8

21.2

29.7

–38.7

2.4

–4

5.7

23

.6 32

.4 22

.7 30

.2 30

.3 17

.6

Conc

lude

d

194

Annual Repor t 2008

including

Perio

d

NBU

disco

unt r

ate1

Aver

age w

eighte

d inte

rest

rate

on al

l instr

umen

ts

credit

s gra

nted

throu

gh te

nder

over

night

credit

s

repo

tran

sacti

ons

credit

s gra

nted f

or

supp

ort o

f long

-term

bank

liq

uidity

stabil

izatio

n cre

dits

swap

tran

sacti

ons

refin

ancin

g cre

dits o

n co

llater

al of

prop

erty

rights

1 2 3 4 5 6 7 8 9 10

2005 9.5 14.7 12.9 14.9 12.0 – 15.0 – 2006 8.5 11.5 10.4 12.1 10.7 – – 9.5 82007 8.0 10.1 10.0 11.1 – – – – 82008 12.0 15.3 16.6 16.0 13.8 – – 15.1

from 01.01 10.0 – – – – – – – January 10.0 14.6 15.5 14.6 – – – – February 10.0 14.7 15.3 14.8 14.6 – – 14.5 March 10.0 14.8 15.2 14.8 14.5 – – 14.5 from 30.04 12.0 – – – – – – – April 12.0 15.3 15.5 15.3 14.9 – – 14.8 May 12.0 15.8 15.7 15.8 15.2 – – 15.0 June 12.0 15.6 15.4 15.9 14.7 – – – July 12.0 15.9 16.1 15.2 16.1 – – – August 12.0 15.9 15.8 15.9 16.0 – – – September 12.0 14.6 16.0 16.0 15.7 – – – October 12.0 15.2 16.8 16.0 15.5 – – 16.0 November 12.0 15.6 16.4 16.0 15.1 – – 16.4 December 12.0 14.8 18.3 19.7 12.6 – – –

1 At end of period.

Interest rates on refinancing(average weighted annual rates, %)

Tables

includ

ing

total

other

finan

cial c

orpo

ratio

ns

gene

ral g

over

nmen

t no

n-fin

ancia

l co

rpor

ation

s and

non-

profi

t insti

tution

s ser

ving

hous

ehold

s 1 ho

useh

olds 2

includ

ing

Perio

d

Amou

nt,

UAH,

mln.

int

eres

t rate

, %

in

natio

nal

curre

ncy

in for

eign

curre

ncy

Amou

nt,

UAH,

mln.

int

eres

t rate

, %

Am

ount,

UA

H,

mln.

inter

est

rate,

%

Amou

nt,

UAH,

ml

n. int

eres

t ra

te, %

Am

ount,

UA

H,

mln.

inter

est

rate,

%

1 2

3 4

5 6

7 8

9 10

11

12

13

2005

26

9 321

8.0

8.5

6.8

9 8

45

10.2

1 625

11

.0 86

901

8.2

170 9

51

7.7

2006

46

3 943

6.8

7.6

5.8

15

774

9.8

2 572

12

.0 19

9 025

6.5

24

6 572

6.9

20

07

685 8

71

7.2

8.2

5.8

26 42

6 9.4

7 0

01

2.6

316 3

50

6.6

336 0

94

7.4

2008

1 1

39 32

5 8.3

9.9

5.4

41

568

12.1

13 31

2 15

.0 61

7 529

7.5

46

6 916

8.7

Ja

nuar

y 61

151

8.0

8.8

6.2

2 342

11

.3 67

8 12

.7 26

916

7.7

31 21

6 7.9

Fe

brua

ry

67 28

9 7.9

8.9

5.9

2 3

09

11.5

833

13.1

28 85

4 7.8

35

292

7.6

March

82

112

7.8

9.0

5.6

4 002

9.7

1 2

39

13.6

36 93

9 7.9

39

931

7.4

April

101 1

07

7.7

9.5

4.8

4 016

11

.5 1 2

01

13.7

54 35

9 7.3

41

532

7.6

May

113 5

03

7.1

10.1

3.8

2 787

11

.5 1 3

53

14.8

71 94

0 6.1

37

422

8.5

June

12

4 607

7.0

9.7

3.7

3 9

55

11.4

1 230

15

.7 83

331

5.9

36 09

1 8.7

Ju

ly 13

1 679

7.6

9.1

5.0

4 2

45

13.2

1 425

15

.2 82

338

6.4

43 67

1 9.1

Au

gust

113 0

76

7.6

9.0

4.9

3 017

12

.1 1 4

50

15.4

69 13

1 6.6

39

478

8.9

Septe

mber

11

1 804

8.8

9.8

6.3

4 7

30

11.7

1 623

15

.5 60

560

7.8

44 89

2 9.6

Oc

tober

75

396

9.5

10.4

7.2

2 889

13

.1 1 2

23

15.8

32 59

8 9.2

38

687

9.3

Nove

mber

62

168

10.8

12.0

8.3

2 573

12

.6 65

5 16

.5 25

881

11.6

33 06

0 9.9

De

cemb

er

95 43

3 11

.3 13

.0 8.2

4 7

02

14.7

404

20.0

44 68

3 12

.2 45

644

10.0

1In

form

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n on

dep

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of n

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mpl

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hou

seho

lds

sect

or.

2In

form

atio

n on

dep

osits

of s

ubse

ctor

s of

hire

d em

ploy

ees

and

rece

iver

s of

inco

me

from

pro

perty

and

tran

sfer

s of

the

hous

ehol

ds s

ecto

r.

Inte

rest

rate

s on

dep

osits

hel

d wi

th d

epos

itory

cor

pora

tions

(exc

ludi

ng N

atio

nal B

ank

of U

krai

ne) i

n re

porti

ng p

erio

d by

sec

tors

of t

he e

cono

my

(ave

rage

wei

ghte

d an

nual

rat

es, %

)

195

196

Annual Repor t 2008

Inte

rest

rate

s on

cre

dits

gra

nted

by

depo

sito

ry c

orpo

ratio

ns (e

xclu

ding

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l Ban

k of

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) in

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rting

per

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by s

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rs o

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y(a

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ates

, %)

includ

ing

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inc

luding

, wi

thout

over

draft

oth

er fin

ancia

l co

rpor

ation

s 1

gene

ral g

over

nmen

t no

n-fin

ancia

l co

rpor

ation

s and

non-

profi

t insti

tution

s se

rving

hous

ehold

s 2

hous

ehold

s 3

includ

ing

includ

ing

Perio

d

Amou

nt,

UAH,

mln.

int

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t ra

te, %

in

natio

nal

curre

ncy

in for

eign

curre

ncy

Amou

nt,

UAH,

ml

n.

inter

est

rate,

%

in na

tiona

l cu

rrenc

y

in for

eign

curre

ncy

Amou

nt,

UAH,

ml

n.

inter

est

rate,

%

Amou

nt,

UAH,

ml

n.

inter

est

rate,

%

Amou

nt,

UAH,

ml

n.

inter

est

rate,

%

Amou

nt,

UAH,

ml

n.

inter

est

rate,

%

1 2

3 4

5 6

7 8

9 10

11

12

13

14

15

16

17

2005

43

8 391

14

.6 16

.4 11

.5 35

5 815

14

.1 16

.0 11

.6 82

9 14

.0 79

18

.6 39

6 276

14

.4 41

207

16.3

2006

62

7 967

14

.1 15

.4 11

.3 49

4 758

13

.6 15

.1 11

.3 2 1

24

14.3

8

15.8

534 6

77

13.9

91 15

9 15

.2 20

07

969 5

67

13.5

14.4

11.3

768 9

65

13.0

13.9

11.3

3 438

15

.1 10

13

.5 80

9 995

13

.1 15

6 125

15

.6 20

08

1 116

456

16.0

17.8

11.6

868 5

42

15.5

17.6

11.6

5 536

17

.0 25

21

.6 94

5 532

15

.5 16

5 369

18

.7 Ja

nuar

y 79

935

13.7

14.7

11.0

61 18

8 13

.0 14

.0 11

.0 30

5 15

.8 –

– 68

236

13.0

11 39

4 18

.0 Fe

brua

ry

96 70

6 14

.0 15

.1 10

.9 75

587

13.4

14.7

10.8

421

16.5

2

8.3

78 25

9 13

.3 18

025

17.1

March

10

6 425

14

.4 15

.7 10

.9 83

014

13.9

15.3

10.9

663

16.7

– –

87 29

1 13

.8 18

471

17.5

April

95 44

5 15

.0 16

.8 11

.0 72

246

14.6

17.0

11.0

413

16.0

– –

76 64

6 14

.3 18

386

17.7

May

80 48

3 15

.7 17

.8 11

.4 59

035

14.9

17.6

11.5

485

16.7

11

17.0

65 68

3 14

.9 14

309

19.2

June

95

763

15.8

17.6

11.9

74 36

0 15

.2 17

.3 11

.9 47

3 16

.2 –

– 80

710

15.2

14 58

0 18

.9 Ju

ly 10

3 251

15

.4 17

.6 11

.5 79

298

14.5

17.1

11.5

439

18.2

– –

86 26

5 14

.6 16

547

19.4

Augu

st 95

310

16.0

18.0

12.1

72 06

3 15

.1 17

.3 12

.0 44

5 17

.0 –

– 79

566

15.3

15 29

9 19

.4 Se

ptemb

er

105 1

78

16.1

17.7

12.4

80 76

4 15

.2 16

.8 12

.6 75

2 17

.7 –

– 88

708

15.5

15 71

8 19

.5 Oc

tober

82

187

17.8

19.4

12.4

62 37

1 17

.2 19

.1 12

.5 37

6 16

.8 –

– 71

245

17.3

10 56

7 20

.6 No

vemb

er

67 92

0 18

.9 21

.9 11

.4 54

288

18.7

22.6

11.5

276

17.1

– –

62 89

2 18

.7 4 7

53

21.6

Dece

mber

10

7 853

19

.7 21

.6 11

.9 94

329

19.4

21.6

11.9

487

18.0

12

27.8

100 0

33

19.7

7 321

19

.3 1

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useh

olds

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tor.

197

Tables

Currencies 2005 2006 2007 2008

100 Australian Dollar 390.88 380.32 423.29 443.77 100 Pound Sterling 933.76 929.45 1010.69 966.88

10000/100 1 Azerbaijan Manat 10.83 557.91 588.48 641.78 10 Belarussian Ruble 0.02 0.02 0.02 0.02

100 Danish Krone 85.76 84.96 92.85 103.38 100 US Dollar 512.47 505.00 505.00 526.72 100 Estonian Kroon 40.84 40.50 44.21 49.26 100 Icelandic Krona 8.16 7.26 7.90 5.76

100 Canadian Dollar 422.89 445.16 471.98 493.94 100 Kazakh Tenge 3.86 4.01 4.12 4.38 100 Latvian Lats 909.94 907.95 988.22 1097.12 100 Lithuanian Litas 185.20 183.56 200.36 223.24 100 Moldovan Leu 40.68 38.47 41.67 50.75 100 Norwegian Krone 79.67 78.80 86.34 93.63 100 Polish Zloty 158.76 162.77 183.06 219.19 10 Russian Ruble 1.81 1.86 1.98 2.11

100 Singapore Dollar 308.03 317.81 335.22 371.65 100 Slovak Koruna 16.55 17.04 20.49 24.67

10000/100 2 Turkish Lira 380.29 352.97 387.74 404.35 10000 Turkmen Manat 9.86 9.71 9.71 5.30 1000 Hungarian Forint 25.78 24.02 27.53 30.64

100 Uzbek Sum 0.46 0.41 0.40 0.40 100 Czech Koruna 21.44 22.37 24.95 30.84 100 Swedish Krona 68.96 68.50 74.79 80.03 100 Swiss Franc 412.75 402.78 421.16 486.09 100 RNB (China) 62.53 63.34 66.40 75.85

1000 Japanese Yen 46.69 43.40 42.92 51.40 100 Euro 638.99 633.69 691.79 770.80 100 SDR 758.02 742.83 772.94 830.84

1 From January 2006, 100 Azerbaijan Manat. 2 From January 2005, 100 Turkish Lira.

Official exchange rate of Hryvnia against foreign currencies set by the National Bank ofUkraine, period average (UAH)

198

Annual Repor t 2008

Currencies 2005 2006 2007 2008

100 Australian Dollar 368.69 398.47 443.46 531.22 100 Pound Sterling 867.59 990.45 1009.73 1114.30

10000/100 2 Azerbaijan Manat 11.00 579.46 597.35 961.30 10 Belarussian Ruble 0.02 0.02 0.02 0.04

100 Danish Krone 80.06 89.20 99.50 145.70 100 US Dollar 505.00 505.00 505.00 770.00 100 Estonian Kroon 38.17 42.51 47.42 69.38 100 Icelandic Krona 7.93 7.14 8.13 3.74

100 Canadian Dollar 432.85 435.24 515.63 626.36 100 Kazakh Tenge 3.77 3.98 4.19 6.38 100 Latvian Lats 851.60 953.94 1064.49 1533.47 100 Lithuanian Litas 173.53 192.62 214.88 314.40 100 Moldovan Leu 39.36 39.13 44.62 74.02 100 Norwegian Krone 74.49 80.73 93.05 110.32 100 Polish Zloty 154.70 173.61 206.01 261.80 10 Russian Ruble 1.75 1.92 2.06 2.62

100 Singapore Dollar 303.36 329.22 349.22 534.09 100 Slovak Koruna 15.77 19.31 22.08 36.03

10000/100 3 Turkish Lira 374.09 356.81 431.92 502.43 10000 Turkmen Manat 9.71 9.71 9.71 5.40 1000 Hungarian Forint 23.65 26.42 29.23 40.76

100 Uzbek Sum 0.43 0.41 0.39 0.55 100 Czech Koruna 20.59 24.20 27.91 40.76 100 Swedish Krona 63.46 73.57 78.53 99.14 100 Swiss Franc 383.17 413.89 446.85 725.49 100 RNB (China) 62.57 64.70 69.14 112.65

1000 Japanese Yen 42.83 42.38 44.66 85.21 100 Euro 597.16 665.09 741.95 1085.55 100 SDR 721.78 759.72 798.03 1186.01

1 Established at last calendar day. 2 From January 2006, 100 Azerbaijan Manat. 3 From January 2005, 100 Turkish Lira.

Official Exchange Rate of Hryvnia against Foreign Currencies Set by the National Bankof Ukraine, end of period1

(UAH)

OPENING ADDRESS OF THE GOVERNOR OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2MEMBERS OF THE COUNCIL OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4MEMBERS OF THE BOARD OF THE NATIONAL BANK OF UKRAINE . . . . . . . .6ORGANIZATIONAL CHART OF THE NATIONAL BANK OF UKRAINE . . . . . . . . .8ABOUT THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

PART 1. GENERAL ECONOMIC SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .131.1. SOCIAL AND ECONOMIC SITUATION IN UKRAINE . . . . . . . . . . . . . . . . . .14

1.1.1. GROSS DOMESTIC PRODUCT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141.1.2. DYNAMICS OF CONSUMER PRICES AND PRODUCER PRICES . .211.1.3. FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241.1.4. INCOME AND EXPENDITURES OF THE POPULATION . . . . . . . . . .291.1.5. THE LABOR MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

1.2. EXTERNAL ECONOMIC SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .321.2.1. BALANCE OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

1.2.2. EXTERNAL DEBT OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . .371.3. SURVEY OF THE WORLD ECONOMY

AND INTERNATIONAL MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

PART 2. ACTIVITIES OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . .432.1. MONETARY POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

2.1.1. IMPLEMENTATION OF THE MONETARY POLICYGUIDELINES IN 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

2.1.2. NON-CASH EMISSION BY THE NATIONAL BANK OF UKRAINE . . .472.1.3. MONEY CIRCULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .482.1.4. CASH CIRCULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

2.2. EXCHANGE RATE POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .522.2.1. DYNAMICS OF THE EXCHANGE RATE OF HRYVNIA.

REAL EFFECTIVE EXCHANGE RATE . . . . . . . . . . . . . . . . . . . . . . . .522.2.2. DEVELOPMENT OF THE FOREIGN EXCHANGE

MARKET OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .532.2.3. IMPROVEMENT OF THE FOREIGN EXCHANGE

SYSTEM REGULATION. PREVENTIVEMEASURES WITH REGARD TO OUTFLOW OF FOREIGN CURRENCY ABROAD . . . . . . . . . . . . . . . . . . . . . . . . .55

2.2.4. INTERNATIONAL RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .572.3. DEVELOPMENT OF THE BANKING SECTOR OF UKRAINE . . . . . . . . . . .58

2.3.1. INDICATORS OF ACTIVITIES OF THE BANKS OF UKRAINE . . . . .582.3.2. SURVEY OF THE SECTOR OF OTHER DEPOSITORY

CORPORATIONS (BANKS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .602.3.3. DEPOSIT MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .622.3.4. CREDIT MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .652.3.5. CREDITS AND DEPOSITS IN THE INTERBANK MARKET . . . . . . . .692.3.6. OPERATIONS OF BANKS IN THE SECURITIES MARKET . . . . . . . .70

2.4. REGULATION OF ACTIVITIES OF BANKS OF UKRAINE AND SUPERVISION OF THEIR ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . .732.4.1. REGULATION OF ACTIVITY OF BANKS OF UKRAINE . . . . . . . . . . .732.4.2. SUPERVISION OF THE BANKS' ACTIVITIES . . . . . . . . . . . . . . . . . .762.4.3. INSPECTION OF BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .792.4.4. REGISTRATION AND LICENSING OF BANKS . . . . . . . . . . . . . . . . .812.4.5. TERMINATION OF THE BANKS' ACTIVITIES . . . . . . . . . . . . . . . . . .85

2.5. FOREIGN EXCHANGE CONTROL AND LICENSING . . . . . . . . . . . . . . . . .872.6. PAYMENT SYSTEM OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88

2.6.1. INTERBANK SETTLEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .882.6.2. DEVELOPMENT OF THE PAYMENT CARD SYSTEMS . . . . . . . . . .902.6.3. BASIC RESULTS OF THE INTERNATIONAL SYSTEMS'

OPERATION FOR TRANSFER OF FUNDS BETWEEN INDIVIDUALS WITHOUT OPENING THE ACCOUNTS IN 2008 . . . . .92

2.6.4. CASH PERFORMANCE OF THE BUDGETS OF UKRAINE . . . . . . .92

CONTENTS

CONTENTS

2.7. SERVICING OF THE INTERNAL (DOMESTIC) DEBTS OF UKRAINE . . . . .932.8. LEGAL ENVIRONMENT OF THE BANKING SYSTEM . . . . . . . . . . . . . . . . .942.9. RISK MANAGEMENT IN THE NATIONAL BANK OF UKRAINE . . . . . . . . . .962.10. FINANCIAL MONITORING ON PREVENTION OF USING

THE BANKING SYSTEM FOR LEGALIZATION (LAUNDERING) OF PROCEEDS OBTAINED FROM CRIME . . . . . . . . . . . . . . . . . . . . . . . .96

2.11. INTERNATIONAL COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .972.11.1. RELATIONSHIPS OF THE NATIONAL BANK OF UKRAINE

WITH CENTRAL BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97AND BANKING INSTITUTIONS OF OTHER COUNTRIES

2.11.2. COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH THE INTERNATIONAL FINANCIAL AND OTHERORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

2.12. BASIC TRENDS OF ECONOMIC WORK OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . .102

2.12.1. STATISTICAL AND INFORMATION SUPPORTOF THE NATIONAL BANK OF UKRAINE ACTIVITY . . . . . . . . . . . .102

2.12.2. ECONOMIC RESEARCH AND FORECASTING . . . . . . . . . . . . . . .1042.13. SCIENTIFIC RESEARCH OF THE NATIONAL BANK OF UKRAINE . . . .1042.14. IMPROVEMENT OF ACCOUNTING AND FINANCIAL REPORTING . . . .1052.15. AUDIT OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . .1052.16. BANKNOTE AND COIN PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . .106

2.16.1. ACTIVITIES OF THE BANKNOTE PRINTING AND MINTING WORKS OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . .106

2.16.2. THE BANKNOTE PAPER MILL ACTIVITY . . . . . . . . . . . . . . . . . . .1072.17. STAFFING AND PERSONNEL TRAINING AND RETRAINING . . . . . . . . .1072.18. DEVELOPMENT OF THE MATERIAL AND TECHNICAL

BASE ACCORDING TO MAIN DIRECTIONS . . . . . . . . . . . . . . . . . . . . . .1092.19. RESULTS OF THE FINANCIAL ACTIVITIES

OF THE NATIONAL BANK OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . .110

PART 3. CALENDAR OF BASIC EVENTS HELD IN 2008 . . . . . . . . . . . . . .113

PART 4. METHODOLOGICAL COMMENTS TO THE ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119

PART 5. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 . . . . . . . . . . . . . . . . .125

CONSOLIDATED BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126CONSOLIDATED INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127CONSOLIDATED STATEMENT OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . .128CONSOLIDATED STATEMENT OF CHANGES IN EQUITY . . . . . . . . . . . . . . .130NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . .1311. PRINCIPAL ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1312. BASIS OF PRESENTATION AND ACCOUNTING POLICIES . . . . . . . . . . . .1313. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

IN APPLYING ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .1424. EFFECT OF ECONOMIC CONDITIONS ON THE FINANCIAL

POSITION AND RESULTS OF OPERATIONS OF THE NBU . . . . . . . . . . . .1425. FOREIGN CURRENCY FUNDS AND DEPOSITS . . . . . . . . . . . . . . . . . . . . .1446. FOREIGN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1457. STATE SECURITIES OF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1488. LOANS TO BANKS AND OTHER BORROWERS . . . . . . . . . . . . . . . . . . . . .1499. INTERNAL STATE DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15210. IMF QUOTA CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15311. FIXED ASSETS AND INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . . . . . . . .15412. OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15513. ACCOUNTS OF BANKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15614. ACCOUNTS OF STATE AND OTHER INSTITUTIONS . . . . . . . . . . . . . . . .15715. DEPOSIT CERTIFICATES ISSUED BY THE NBU . . . . . . . . . . . . . . . . . . . .15716. LIABILITIES TO THE IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157

17. OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15818. PROFITS PAYABLE TO STATE BUDGET . . . . . . . . . . . . . . . . . . . . . . .15819. MANAGEMENT OF CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15920. CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .16021. INTEREST INCOME AND EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . .16022. FEE AND COMMISSION INCOME AND EXPENSE . . . . . . . . . . . . . . .16023. OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16124. STAFF COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16125. ADMINISTRATIVE AND OTHER EXPENSES . . . . . . . . . . . . . . . . . . . .16126. NET INCREASE IN PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16227. FINANCIAL RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16228. GEOGRAPHICAL ANALYSIS OF FINANCIAL ASSETS

AND LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16529. CREDIT RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16630. CURRENCY RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16731. INTEREST RATE RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16832. LIQUIDITY RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17133. COMMITMENTS, CONTINGENCIES AND DERIVATIVE

FINANCIAL INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17134. FAIR VALUE OF FINANCIAL INSTRUMENTS . . . . . . . . . . . . . . . . . . . .17235. PRESENTATION OF FINANCIAL INSTRUMENTS

BY MEASUREMENT CATEGORIES . . . . . . . . . . . . . . . . . . . . . . . . . . .17436. RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .17637. CONCENTRATION OF ASSETS AND LIABILITIES . . . . . . . . . . . . . . . .17738. SUBSEQUENT EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177AUDITOR'S REPORT (PriceWaterhouseCoopers) . . . . . . . . . . . . . . . . . . . .179

PART 6. TABLE MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181BASIC INDICATORS OF THE ECONOMIC DEVELOPMENTOF UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182SURVEY OF DEPOSITORY CORPORATIONS (INCLUDING THE NATIONAL BANK OF UKRAINE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185SURVEY OF DEPOSITORY CORPORATIONS (EXCLUDING NATIONAL BANK OF UKRAINE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187MONETARY AGGREGATES AND COMPONENTS . . . . . . . . . . . . . . . . . . .189LOANS GRANTED BY DEPOSITORY CORPORATIONS (EXCLUDINGNATIONAL BANK OF UKRAINE) BY SECTORS OF THE ECONOMY . . . .190DEPOSITS HELD WITH DEPOSITORY CORPORATIONS (EXCLUDINGNATIONAL BANK OF UKRAINE) BY SECTORS OF THE ECONOMY . . . .192INTEREST RATES ON REFINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . .194INTEREST RATES ON DEPOSITS HELD WITH DEPOSITORYCORPORATIONS (EXCLUDING NATIONAL BANK OF UKRAINE) INREPORTING PERIOD BY SECTORS OF THE ECONOMY . . . . . . . . . . . .195INTEREST RATES ON CREDITS GRANTED BY DEPOSITORYCORPORATIONS (EXCLUDING NATIONAL BANK OF UKRAINE) INREPORTING PERIOD BY SECTORS OF THE ECONOMY . . . . . . . . . . . .196OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGNCURRENCIES SET BY THE NATIONAL BANK OF UKRAINE, PERIOD AVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197OFFICIAL EXCHANGE RATE OF HRYVNIA AGAINST FOREIGNCURRENCIES SET BY THE NATIONAL BANK OF UKRAINE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198

CONTENTS

Annual Reportof the National Bank of Ukraine for 2008

Editorial staff:Anatolii Shapovalov (Head)Vira Gal (Deputy Head)Natalia Hrebenyk Vira Rychakivska Mykola MelnychukOlena ScherbakovaTetiana Halchynska

Compiled by the NBUStatistics and Reporting Department

Translated byHalyna HolubievaLiudmyla PatenkoValentyna KravchenkoOlha Zahorodniaia

Proof-readers:Kristina ZasypkinaOlena Marchenko

Responsible for the publication,Head of the Division for Issueof NBU Statistic Publications of the Editorial Board of NBU Periodicals:Mylana Boichuk

Photograps by Vladyslav Nehrebetskyi

Address of the Editorial Board of NBU Periodicals:7 Nauky Avenue,Kyiv, 03028, UkraineTelephone: (38 044) 527 3014Telephone and fax: (38 044) 524 9625E-mail: [email protected]

Laid out and printed by the NBUMaintenance Administration OfficeMade up byOlexander Yurkin

Artistically designed byOlena Horbatovska

Authorized publication: 20 July 2009Format: 60×84/8 OffsetCirculation: 200 copiesOrder # 9-0594

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